Required Reserve Ratio in China is raised to 16%
Projected to take 40 billion yuan out of liquidity, in economists' terms.
So what does this mean?
Therefore, keeping the Money Supply growth equal to Real GDP growth, keeps inflation low.
That's it!
The problem - the "Central Bank" - Federal Reserve in the U.S.A. or People's Bank of China (PBOC) in China - doesn't fully control the Money Supply. Banks, lenders and borrowers ALSO have an important role.
Therefore, by restricting the amount that banks have on hand, the PBOC is trying to tie the hands of banks by not letting them lend as much. Less loans = less money in supply!
FYI - in the U.S.A. the rr = 10%, unchanged since 1991.
So what does this mean?
Economists believe that money and prices have a one-to-one relationship in the long run. That is, an increase in the Money Supply will be reflected fully as inflation, in the future.
Therefore, keeping the Money Supply growth equal to Real GDP growth, keeps inflation low.
That's it!
The problem - the "Central Bank" - Federal Reserve in the U.S.A. or People's Bank of China (PBOC) in China - doesn't fully control the Money Supply. Banks, lenders and borrowers ALSO have an important role.
Therefore, by restricting the amount that banks have on hand, the PBOC is trying to tie the hands of banks by not letting them lend as much. Less loans = less money in supply!
FYI - in the U.S.A. the rr = 10%, unchanged since 1991.
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