Due to rapid increases in socioeconomic development and the human population over the past few decades, the shallow lakes in China have suffered from eutrophication and poor water quality. The conditions in Lake Dianchi Caohai, which is in the northern part of Lake Dianchi, are considered the most serious. The ecological restoration of Lake Dianchi Caohai began in the late 1980s. Lake managers and the public have been puzzled by the lack of a significant response of the water quality to the flow pattern despite the tremendous investment in water quality improvements. Therefore, lake managers desperately need to understand the responses of pollutant behaviors to proposed management measures. In this paper, a depth-averaged two-dimensional hydrodynamic and water quality model based on hydrological data, measured lake bed elevation, and water quality data is developed to simulate the flow field and water quality of Lake Dianchi Caohai. This model was validated using water quality data from the Caohaizhongxin site in 2016, and a close agreement was found between the model results and observations. Wind-driven circulation in Lake Dianchi Caohai was observed in the model results, which revealed that the lake flow pattern was dominated by wind-driven circulation, while the inflow/outflow played only a subsidiary role during this period. The formation of the wind-driven current in Lake Dianchi Caohai could be roughly divided into three stages. The hydrodynamic processes connected with the distribution of chlorophyll a are evaluated and discussed to adequately understand the hydraulic mechanisms driving the accumulation of cyanobacteria. Moreover, we designed three scenarios after comparing all possible operation scenarios to analyze the contributions of each different operation scenario to the water quality improvements. The optimal ecological operation scenario which has the best impacts on the water quality, especially the reduction in Chla and NH3-N concentration, is proposed based on our comprehensive analysis. The water quality improvement and management suggestions proposed in this paper are based on lake flow patterns and make up for previous studies that did not consider the effects of hydraulic characteristics on water quality improvement in Lake Dianchi Caohai.