Economics papaer - Term Paper Example

It would help in tightening the liquidity of the economy. It can be depicted that when such reserves are made by the commercial banks with the Central Bank then it has an impact upon the balance sheet of both the banks i.e. the Central Bank and the commercial bank. At the outset, there will be rise in the Central Bank’s liabilities since the quantity of deposits that the commercial bank is supposed to keep with the Central Bank is rising by 0.5%. Conversely, the assets side of the commercial bank will be impacted.

There will be rise in the assets side of the commercial banks. It can be treated as deposits at other banks, so in the balance sheet there will be rise in the deposits at other banks too. Question Two It can be stated that there are four basic components of the GDP. They are consumption, investment, government spending and value of exports and imports. The GDP of an economy is calculated by adding up the value of expenditures on the consumption, value of the expenditures in investments, rate of the government procurement of goods and/or services, value of exports of the goods and the services minus the value of the imports of the goods and the services. . All the three components of the GDP will be impacted.

The reason behind this is that when the inflation is controlled then the rate of consumption will increase and thus the economy will be able to invest more. Thus, there will be rise in the consumption, along with rise in the investment and government spending. There will be rise in the exports as well. Effects on the Equilibrium and Aggregate Expenses It can be demonstrated that since the consumption will rise, it is quite obvious that there will be rise in the production as well. Therefore, the equilibrium real GDP will increase.

Question Three The term ‘money multiplier’ can be figured out as the volume of money supply in relation to the volume of the base money. It is worthwhile mentioning that when the reserve deposit ratio or the cash deposit ratio is lower then, the money multiplier tends to be higher. The case of China is just the opposite. It can be demonstrated that when the economy plans to raise the reserve ratio requirement for the banks the money multiplier tends to shrink. Investment Multiplier It has been noticed that Central Bank planned to augment the rate of interest.

If the rate of interest augments then more and more investors get attracted towards the bank. Although paying up of augmented interest rate is an increased cost for the Central Bank, but on the flip side, it can be viewed that the rise in the interest rate may tend to make it quite attractive for the international investors to purchase Renminbi and thus invest those Renminbi in China. With the rise in the interest rates, the income tends to rise thus forcing the consumers to invest in other sectors of the economy as well leading to growth in the overall economy (Bradsher, “China Move Could