European Central Bank - Essay Example

European central bank also decided that it would lend unlimited credits to banks for a period of up to 1 year. The major motivation behind taking this action was the reason that the troublesome economic crisis was experienced in the eurozone. However, many economists argued that they see that actual economic recovery is still far away and this was an interim method to damage-control the convalescing economies of the countries which come under eurozone. It was further stated by the Bank's president that there is a chance that interest rates will go down further as the bank tries to achieve its macroeconomic aims.

This article relates to the macroeconomic side of the economics studies as it talks about the economy as a whole. In particular, the topic discussed in this article is the monetary policy that ECB is using as a tool to revive the fallen economies of various eurozone countries. Monetary policy is a deliberate manipulation of interest rates and money supply in the economy to fulfill the desired macroeconomic targets. ) the rate of Interest: This is one of the most basic approaches by which the government regulates money supply in the economy.

 Ceteris Paribus, An increase in the rate of interest will make people save more and spend less because they think that their money is earning a high rate of interest. Similarly, an increase in the money supply increases the cost of loans and people spend less. This reduces the money supply in the economy. Similarly, when interest rates decrease the exact opposite happens and money supply in the economy increases.Open-Market Operations: In this method, the sale and purchase by the central banks in the security market have the desired effect on the money supply in the economy. For e.g.

an increase in the purchasing by the central bank in the security market increases the amount of money that people has and it increases the money supply in the economy. Similarly, selling these securities in the money market dampens the people buying power and reduces the money supply in the economy.APPLICATION:In this case, as it is discussed the major economic concern is the plummeting demand in the economy, a decrease in interest rates is going to decrease the cost of borrowing and now people would borrow more and spend more in order to maintain their standard of living.

Since interest rates are lower than inflation in the current scenario, if people keep their money in a deposit account their money will lose value and hence people will prefer to spend now than save in order keep the purchasing power of money stable and hence there will be more demand in the economy. This will increase the aggregate demand in the economy, which in turn will boost the employment level in the economy and more will be produced resulting in both economic growth and GDP. This will, theoretically, rev up the economy.