Question Details

Why would the Chinese central bank be against higher interest rates 


“China- central bank, the People- Bank of China, has raised the deposit reserve ratio requirement for financial institutions from 6 percent to 7 percent to stem rapid lending growth. An analyst said the central bank had few options because recent verbal admonishments against excessive lending had proved ineffective and raising interest rates would have increased already growing speculative purchases of the Chinese currency.” The following four questions relate to this clip. 
1. How would raising the deposit reserve ratio stem rapid lending growth? 
a) by decreasing excess reserves in the banking system 
b) by lowering the interest rate 
c) by taxing loans 
d) by shrinking reserves in the banking system 112 
2. Will this succeed in stemming lending growth without increasing the interest rate? 
a) yes, because the interest rate is determined by other forces 
b) yes, because the Chinese banking system has a fixed interest rate 
c) no, because less lending happens because the interest rate is lower 
d) no, because less lending means demand for money is greater than supply 
3. Why would a rising interest rate increase speculative purchases of the Chinese currency? 
a)	this is incorrect, speculators don’t care about the interest rate 
b)	if the interest rate rises foreigners will want to invest in Chinese bonds and so will buy Chinese currency to do so, increasing its price 
c)	a higher interest rate increases exports, increasing the demand for the Chinese currency, increasing its price 
d)	this is incorrect, a higher interest rate decreases bond prices so speculators will stay away 

4. Why would the Chinese central bank be against higher interest rates ? 
a)	they would stimulate an already too-hot Chinese economy 
b)	they would increase the exchange rate which would hurt Chinese exporters 
c)	the central bank would lose control of the monetary sector 
d)	the central bank hates speculators 

5. “The strength of the GDP data only highlighted the diverging views between the dollar bulls, who predict that strong growth will support the currency, and the bears who warn that stronger growth will only serve to widen the current account deficit and thus undermine the greenback. Those forces seem to be coming together to keep us right where we are for the time being.” What are these two forces? 
a)	higher foreign investment and higher imports 
b)	lower foreign investment and higher imports 
c)	higher foreign investment and lower imports 
d)	higher foreign investment and lower imports 



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