In the spring of 2007, the Chinese central bank, The Peoples Bank of China,announced an increase in the reserve requirement for the countrys banks. This wasthe seventh such increase in less than a year. During this same period, the Chineseeconomy was growing at over 11% per year.

Based on what you learned about monetary policy in lecture, explain why thePeoples Bank took this action.

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