Question

the peoples bank of china, the country's central bank, raises the reserve requirments of its top commercial banks to put a squeeze on the credit market following a spell of robust economic growth. b. how would you expect chinas monetary policy of squeezing the credit market to influence AD in china. would you expect it to have a similar effect? c. what actions might the peoples bank of china take to slow the economy?

Answer 1

b)China's Monetary Policy of squeezing the credit market by raising the Reserve Requirement of its top commercial banks would lead to a reduction in credit offered to consumers and businesses. Thus, both Consumption and Investment Expenditure would Decrease. As a result of this, Aggregate Demand would also Decrease. Thus, Raising Reserve Requirement would Decrease AD.

c) China can use other monetary Policy tools to slow the Economy. It can Reduce money supply using Open market Sales. This would Increase the interest rate and Decrease Consumption and spending leading to a reduction in AD. Moreover, It can raise the Repo rate and Increase the cost of borrowing for commerical banks and in turn for consumers and businesses. This will again reduce AD.