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Money Supply & Reserve assistance

1.a.Under what assumptions is the money supply curve vertical?

b.Make an argument for why the money supply curve could be upward-sloping.

2. In the spring of 2007, the Chinese central bank, The Peopleâ??s Bank of China, announced an increase in the reserve requirement for the countryâ??s banks. This was the seventh such increase in less than a year. During this same period, the Chinese economy was growing at over 11% per year.

a.Based on what you learned about monetary policy in lecture, explain why the Peopleâ??s Bank took this action.

b.A Hong Kong economist was quoted at the time as saying that these required reserve increases were â??not binding on banksâ?? capabilities to lend.â? Explain what reserve policy on the part of Chinese banks would diminish the effectiveness of the required ratio increase in achieving the goal you outlined in part a.

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Money Supply & Reserve

1.a.Under what assumptions is the money supply curve vertical?
The money supply is vertical when it is assumed that the money supply is totally inelastic. This happens when the Federal Reserve chooses a money policy to fix the value with no regard to the interest rate.
b.Make an argument for why the money supply curve could be upward-sloping.
The money supply curve could be upward-sloping reflecting the fact that higher the interest rate, the greater will be the availability of money supply. Consider the situation, when higher interest rates lead to individuals to save more money. This money is now available for lending. On the other hand higher interest rates induce businesses to borrow less. The ...

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