1.a.Under what assumptions is the money supply curve
vertical?
b.Make an argument for why the money supply curve could be
upward-sloping.
2. In the spring of 2007, the Chinese central bank, The
Peopleâ??s Bank of China, announced an increase in the reserve requirement for
the countryâ??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.
a.Based on what you learned about monetary policy in
lecture, explain why the Peopleâ??s Bank took this action.
b.A Hong Kong economist was quoted at the time as saying
that these required reserve increases were â??not binding on banksâ??
capabilities to lend.â? 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.
