3.
Increasing the amount of deposits that commercial banks must hold with the central bank will diminish the money multiplier, which is the amount of money a bank can create with each dollar of reserves. The money multiplier is determined by the reserve ratio. The higher the reserve ratio, the less money the bank will have to lend out, diminishing the money multiplier. Requiring the commercial banks to increase deposits will increase the reserve ratio by.5%, thereby diminishing the money multiplier by .5.
The spending multiplier, which is the measure of additional spending in the economy generated as a result of the initial spending, will be reduced because of the reduction in consumption caused by less wages, rent, and profits paid by firms. The investment multiplier, the measure of additional investment in the economy generated as a result of the initial investment, will be reduced because of the reduction in investment caused by less lending to firms for business ventures.
The Marginal Propensity to Save, the increase in the desire to save as a result of increased income, will decrease as a result of China's policy because it will slow inflation, making money more valuable in consumption than in saving. A lower MPS increases the money multiplier effect by putting a larger portion of each created dollar back into the economy instead of sitting in a bank account. The Marginal Propensity to Consume, the increase in the desire to consume as a result of increased income, will increase as a result of China's policy for the same reasons that MPS decreased.
The Average Propensity to Consume, the actual proportion of income which is spent on consumption, would typically increase as money becomes more valuable in consumption...
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