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China Central Bank Boosts Stimulus to Aid Covid-Hit Economy

EconEye Admin

The People’s Bank of China (PBOC) lowered the required reserve ratio and cut its key interest rates twice this year.—Bloomberg.com

Answer the following questions to check your understanding of the story.

1) What is the effect of the PBOC lowering the required reserve ratio?

With a lower required reserve ratio, banks hold ____________ reserves and make ____________ loans.

Wrong! - With a lower required reserve ratio, what happens to banks’ excess reserves? What do they do with these excess reserves?

Correct! - With a lower required reserve ratio, China’s banks can hold fewer reserves, so excess reserves increase, which enables them to increase loans.

2) How does the PBOC’s decision to cut its key interest rates twice during 2022 aid China’s covid-hit economy?

The PBOC’s decision eventually ____________.

Wrong! - What are the ripple effects of a cut in the key interest rates? Do investment and consumption expenditure change? Does potential GDP change?

Well Done! - When the PBOC cuts its key interest rates, consumption expenditure and investment decrease over time, and eventually aggregate demand increases.

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