Econ 2130 Money and Banking
09016937 Chan Yan Ki Gillry09018891 Kwok Man Kan Wendy09010521 Lau Tsz Kwan Larraine09008373 Leung Ho Sing Akira09021124 Wong Wing Ki Wallis
Newspaper Clip-China raises bank reserve ratio again
19th,November,2010
About the news• 19-Nov-2010
People’s Bank of China said that it will raise the required reserve ratio by 0.5%
The 4th time it raises the required reserve ratio this year
partly because of the quantitative easing2 in U.S.
• Quantitative easing2=the second round of quantitative easing
• Quantitative easing:a monetary policyaims to increase money supply (Ms)
by increasing excess reserves of the bank
About the news• U.S.: keep lowering the long-term interest
rateHot money will flow to other countries
• China: hot money inflow may hurt the economytake measures to cool down economic activities, slow down the growth in bank lendingtighten the liquidityavoid dangerous bubble in stock and real estate prices
• increase in required reserve ratioincrease in required reserve ratioachieve the goal??achieve the goal??
How the policy achieve the purpose • Increase in required reserve rat
multiplier =
Required reserve = r × checkable deposit
(r) ratio reserve required
1
How the policy achieve the purpose
• Required reserve• More reserve are need
• multiplier • Weaken the deposit expansion money supply ↓• less money will be lend out• Less Investment Result • Slow down the growth in bank lending• cool down the economic activities
How the policy achieve the purpose
• Decrease in Money supply interest rate increase
(money supply= currency + checkable deposit)
D = multiplier × excess reserve
How the policy achieve the purpose
• Interest rate ↑• Investment ↓• AD ↓• Price level ↓
Result• Control inflation • Avoid a dangerous
bubble in stock and real estate prices.
P
AS
AD 2
AD 1
output
Disadvantage
• some banks voluntarily have cash that exceed the amount of required reserves
• reserve requirement are not binding
• higher reserve requirements would not change the banks’ holdings of reserves
• no effect on the bank behavior
Disadvantage
• where reserve requirements are binding, requirements can cause immediate liquidity problems for banks
• fluctuating reserve requirements would also create more uncertainty for banks
Other ways to affect the Money supply• Open market operation to control monetary base
1)Open market purchase
↑ reserve, ↑ MB , ↑ MS
2)Open market sales
↓reserve , ↓MB , ↓MS
Open Market Operation
• It refers to the buying and selling of government securities by Central Bank.
• Aims:
- control short-term interest rate
- influence the supply of base money(money supply)
Open Market Operation
• Case 1:
Central Bank purchases govn't bond from the non-bank public with currency money supply interest rate
• Case 2:
Central Bank sells govn't bond from the non-bank public with currency money supply interest rate
Open Market Operation
• Advantages:
- Complete control
- Flexible and precise
- Easily reversed
- Implement quickly
• Limitations:
- Commercial banks keep surplus reserves
Other ways to affect the Money supply
• Discount loans
• ↑reserves in bank’s asset
↑Fed’s reserves in liabilities,
↑ monetary base
↑money supply
• But, change only a one-for-one .(if a bank pays off a loan thereby reducing the reserves)
Discount loans-lending
Discount loans-pay off
Other ways to affect the Monetary base(uncontrollable)
• Float fed clear checks debit it later change MB • Treasury deposits at the Federal Reserves US Treasury move deposit to fed’s
account reserves in banking system decrease MB decrease
THE END
