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Economic - Essay Example

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Economics Table of Contents Economics 1 Table of Contents 2 Introduction 3 Hike in Cash Reserve Ratio 3 Impact on Money Multiplier 4 Impact on Aggregate Demand 5 Conclusion 5 References 5 Introduction Globalization had proved to be a boon for almost every economy around the world initially…
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Download file to see previous pages China adopted this very strategy and hence, climbed up the peak of growth post globalization, although other economies around the world have to compensate for the same. Hence China received pleas for a currency appreciation from nations around the world; nevertheless, it seldom gave such an action a serious thought as it threatened to slow down its economic growth though in the short run. But, China’s central bank recently exhibited compliance to these external requests when it hiked the minimum cash reserve ratio to be maintained by Chinese commercial banks, by 0.5%. This step however, was a well-thought one as it indirectly also favored the country’s economic growth. Hike in Cash Reserve Ratio Banks normally hold a certain amount of reserves which is a part of the deposits which it receives from its customers. These reserves are held as a shield against any unprecedented crisis befalling the economy. In fact, the amounts that these banks should mandatorily hold back are decided by the apex central monetary body on the basis of a number of factors including the risks of being submerged under a crisis. The central bank normally declares a required reserve ratio which the underlying commercial banks must comply to and maintain as a part of the total deposits which they receive. Out of this reserve requirement that they retain, a certain amount needs to be maintained with the concerned central bank of the country as cash reserve ratio. Purpose of CRR is to act as a shield or protection against any crisis. For instance, in case that any bank needs more money than it has with itself at any point of time; in such situations, the bank might turn towards the concerned central bank which forwards this amount eventually. The Chinese Central Bank announced an additional cash reserve ratio of 0.5% over what the domestic commercial banks had been maintaining initially with the former. This step was believed as a development owing to requests for currency appreciation coming from nations all around the world. Such a measure increased the liabilities of the Chinese Central Bank as more and more cash started flowing in from commercial banks. The commercial banks however, experienced an increase in their assets as a result given that a hike in CRR implied an increase in the reserves of these banks. Impact upon the economy of China Central Bank of China’s policy of increasing the CRR by an additional 0.5%, implied a reduction in the amount that the commercial banks affiliated with it, could advance to potential borrowers. Hence, the primary implication had been a reduction in the amount of money being circulated through the nation. On a secondary basis, to check the amount of loan demands, the commercial banks were instigated to raise the market rate of interest which negatively affected the volume of investments in the economy. Thus, GDP is likely to fall. Moreover, when GDP falls, so does the amount of consumption and investment while, the demand for imports increase. Hence, during the second phase, the economy is characterized by an increased reduction in GDP owing to reductions in consumption, investment and net exports. Impact on Money Multiplier Money multiplier, represented is the rate at which an economy can create credit given the economy’s monetary base; it is represented as, MM = (1 + c/d)/ (r/d + c/d); where, c/d ? Currency-Deposit ...Download file to see next pagesRead More
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