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

5a.Based on what you learned about monetary policy in lecture, explain why the People's Bank took this action.

5b.A Hong Kong economist was quoted at the time as saying that these required reserve increases were "not binding on banks' capabilities to lend." Explain what reserve policy on the part of Chinese banks would diminish the effectiveness of the required ratio increase in achieving the goal you outlined in part a.