Question

1.An article in the Wall Street Hippo reported that the Central Bank of Hippoland (CBHIP) has one of the highest reserve requirement ratios in the world. Economists are saying many departments/businesses are starved of credit.

a.What does the article mean by Hippoland departments/businesses are being “starved of credit”?

b.Is there a connection between the CBHIP imposing higher reserve requirement ratios on banks and Hippoland departments/businesses being starved of credit? Briefly explain.

Answer 1

1.

A

These departments or businesses are not getting loans or funds from the CBHIP to run the operations even on a day to day basis. It is creating starvation of credit for these businesses. It is happening due to higher research requirements and banks are able to lend very small amount of funds. It is not able to meet the working capital requirement of the businesses. So, it is said that they are starved of the credit.

B.

Yes, there is a strong connection. A higher reserve requirement, means a lesser amount of reserves are available for the lending. It makes less funds made available to the businesses or departments and it is creating liquidity problems in the organizations. Further, high reserve requirements mean less money creation and money supply. It also makes businesses to be unable to borrow funds from other avenues. It aggravates the problem of starving of the credit. So, there is a direct linkage. A high reserve requirement means higher level of starving of the credit.