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Macro & Micro Economics Of PRC - Essay Example

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PRC is now the fastest growing major economy in the world. The paper "Macro & Micro Economics Of PRC" discusses the reasons for its success such as a formula of cheap labor, ease government policy, overall infrastructure, high productivity, and an underrated exchange rate…
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Macro & Micro Economics Of PRC
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Macro & Micro Economics Of PRC

Download file to see previous pages... PRC is consciously making effort to lower its inflation rate and/or manage inflation expectations by raising bank reserve ratio of deposits through a directive from PRC’s Central Bank. This brings as to the first question as to how will this affect the balance sheets of both the banks and the PRC’s Central Bank. As regard to the banks, their assets, particular deposits will decrease and the same amount will increase the reserve in the "Liabilities" portion in their Balance Sheet.  Expectedly, the assets of the Central Bank either in receivables or deposits will increase as well as their reserves. Normally, banks hold two bank reserves, one is used for cashing checks or satisfying client's withdrawals while the other is called "legal reserves" or sometimes called “federal reserves” or central bank reserves. This is the specific reserves that the PRC’s Central Bank wanted to be raised by the banks, and for this year alone, the reserve requirement ratio (RRR) has been raised for the 5th time to a record high of 21 percent according to Xinhua.   PRC’s Central Bank recent move which is a “contractionary monetary policy” according to Li-Gang Liu, could help manage excessive liquidity in the market but the economic growth of PRC will slow down, however steady during the next two years. Asian Development Bank said in its 2011 Asian Development Outlook that “there is very little risk of hard landing because growth momentum remains robust for the medium term”.”. As compared to last year the Gross Domestic Product (GDP) growth will slow to 9.3% in 2011, a dip from 10.3% annual growth in 2010 (Global Times), mainly due to stubborn inflation this year. One determinant factor of inflation is the Consumer Price Index (CPI), as the CPI rise so is the inflation. Consumer consumption is one of the major components in arriving at the total GDP, the others are government expenditures, gross investment and the net of exports versus imports. Consumer consumption may not be a factor at this time because wages will not outpace production. Government expenditures were already programmed to pay maturing foreign loans, hence will be constant, while investment will decrease minimally due to the expected increase in interest rates. The one that will affect most in computing the GDP is the net difference between exports and imports. As I analyze it, imports will continue to outpace exports due primarily to higher demands for fuel consumption, which are outsourced externally. The World Bank said "strong domestic demand and relative price changes have reduced the importance of external trade for China" (Reuters.com)
There might be an oversupply of products which will considerably affect prices and therefore have an effect on equilibrium. As regards the aggregate expenses, again this will tend to below as the net effect of imports versus exports is high.
PRC’s Central Bank raising of RRR will certainly have an effect on the money multiplier since it will ...Download file to see next pagesRead More
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