However, Bank of England was most interested in buying the government bonds rather than corporate bonds. 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 troublesome economic crisis were experienced in the euro zone. 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 euro zone. 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 under this article is monetary policy which ECB is using as a tool to revive the fallen economies of various euro zone countries. Monetary policy is 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 approach 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 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 central bank in the security market has 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 of these securities in the money market dampens the people buying power and reduces the money supply in the economy.
In this case, as it is discussed the major economic concern is the plummeting demand in the economy, decrease in interest rates are 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 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 and will help