In recent years Chinas central bank has been attempting to c

In recent years, China’s central bank has been attempting to combat a significant real estate bubble by increasing banks’ required reserve ratio. What are Chinese policy makers seeking to achieve?

A) They want interest rates and housing prices to fall

B) They want interest rates to rise and housing price to fall/stabilize

C) They want interest rates to fall and housing prices to rise

D) They want interest rates and housing prices to rise

Solution

Higher required reserve ratio is a contractionary monetary policy tool, which will raise interest rates and lower money supply in the economy. If money supply decreases, demand for housing will fall and housing prices will decrease and/or become stable (from an overheated housing price).

Correct option (B).