Monetary Policy in China Essay Example | Topics and Well Written Essays - 1750 words

Monetary Policy in China - Essay suitThe Chinas cardinal bank, Peoples Bank of China reflects the decision-making bodys concern and aim for the change in insurance policy.The articles primary economic element is the lumbering of the interest rate in the economy. This lowering of the benchmark interest rate has an effect on the provinces monetary policy and money supply. According to Bradsher in the article, effective Tuesday, the Peoples Bank of China lowered by 0.27 percent, to 7.2 percent, the regulated benchmark rate that mercantile banks may charge for one-year loans to business borrowers with strong credit histories. Rates for shorter-term loans will be generally come down even more while rates for longer-term loans will be subject to smaller adjustments, the central bank said, without providing details (September 2008). By lowering the interest rate, the central bank aims to signal to commercial banks to lower the lending rate. By lowering the lending rate, the country aims to make funds more accessible to business borrowers.In figure 1.1, Chinas benchmark rate is lowered. The interest rate aims to lower the money supply in the country. By lowering the money supply coupled with slight stringent limits on lending, Chinas Politburo aims to protect the country from the global economic downturn.By loweri... owering the money supply coupled with little stringent limits on lending, Chinas Politburo aims to protect the country from the global economic downturn.By lowering the interest rate, China aims to signal commercial banks to lower down their lending rate which makes the cost of accessing financing lower. As is shown in figure 1.2 and 1.3, lowering the interest rates lower the costs to financing, which increases the investments in an economy.This increase in investments due to lower costs of financing that is brought by this change in monetary policy does not increase proportionately in the economy. Figure 1.4 shows the effect of the increase in i nvestment in the economy. Because of the multiplier model, the increase in the investment is affected by a given multiplier in an economy thus the economy rises so much more for every increase in the investment due to the lowering of interest rates as part of the monetary policy.Figure 1.5 shows the effect of the monetary policy on the aggregate demand of the economy. Due to the increase in investments, the aggregate demand curve shifts to the right which increases the gross domestic output in the economy. determinationThe monetary policy that has been announced by Chinas Politburo and Peoples Bank of China includes lowering down the interest rates. By lowering the interest rates, the central bank signaled the commercial banks to lower down the interest rates that are charged to business borrowers. This change in monetary policy aims to lower down the cost of borrowing money which will provide more funds accessible more available funds are aimed to be channeled down to business own ers as less stringent limits on lending are enforced as part of the policy.By lowering the interest rates, the government aims to