StudentShare solutions
Triangle menu
  • Home
  • Subjects
  • Miscellaneous
  • Under what circumstances might short term interest rates lose their potency as an instrument of policy control by central bank..........FULL ESSAY TITLE BELOW

Under what circumstances might short term interest rates lose their potency as an instrument of policy control by central bank..........FULL TITLE BELOW - Essay Example

Nobody downloaded yet

Extract of sample
Under what circumstances might short term interest rates lose their potency as an instrument of policy control by central bank..........FULL TITLE BELOW

One such inherent problem which dilutes the effectiveness of interest rates as a viable monetary policy instrument is a liquidity trap situation.
Liquidity trap is a situation when the rate of interest falls too low to be used as a monetary policy tool. It is a situation when the nominal rate of interest becomes so close to zero so that the real rate of interest could almost be considered as negligible. The lower the rate of interest is higher is the amount of aggregate investment expected to be; but the problem in this instance is that commercial banks do not have ample funds to lend out to the investors. Hence, there are little chances of any stimulation in the aggregate level of investment and so of that of the aggregate output in the economy. Usually, the need for lowering the rate of interest arises when the nation in question is in an urgent need of financial stimulation. However, if the nominal rate of interest is already bound to zero and there is practically no room left for further depreciation, the multiplicative impact of an expansionary monetary policy goes in vain (Rabin, 2004).
The LM curve diagram being depicted here shows that till the point when the rate of interest lingers above Rt, there are possibilities of the rate of interest being used as an effective expansionary monetary policy measure. However, at Rt, when the shape of the LM curve becomes almost horizontal, changes in aggregate demand for money from Ma to Mb and vice-versa, has no mushrooming impact at all. Hence, in such a situation, the stimulating power of rate of interest becomes almost zero. Quite obviously, the economy has to rely upon other measures to invigorate the financial condition in the economy and also initiate some steps to reinstate the corrective power of the rate of interest.
Hence, unless there is a fall in the rate of interest there are little chances of an appreciation in the aggregate output level in the current period and ...Show more

Summary

.FULL ESSAY TITLE BELOW (AREA: Economics/Banking/Finance, SPECIFICALLY: Interest Rates, Monetary Policy, Central Banks)
Rate of interest is…
Author : feestjamaal
Under what circumstances might short term interest rates lose their potency as an instrument of policy control by central bank..........FULL ESSAY TITLE BELOW essay example
Read Text Preview
Save Your Time for More Important Things
Let us write or edit the essay on your topic
"Under what circumstances might short term interest rates lose their potency as an instrument of policy control by central bank..........FULL ESSAY TITLE BELOW"
with a personal 20% discount.
Grab the best paper

Check these samples - they also fit your topic

Central Bank Independence and the Conduct of Monetary Policy
Theoretical Underpinnings for Central Bank Independence 7 2.4. Empirical Support for Central Bank Independence 7 2.5. Inflation & Central Bank Independence 8 3. Conclusion 9 4. References 10 5. Bibliography 12 1. Introduction Independence of the Central bank implies that the monetary policymakers are free from direct influence from the government or from the political front while conducting the policies.
5 pages (1250 words) Essay
Explain The Term Structure Of Interest Rates
For instance, a corporate treasurer is a borrower and he has to choose between short term and long term debt. Investors can be seen as lenders who lend their money by purchasing bonds (which can be either long term or short term) (Brigham and Ehrhardt, 2010).
7 pages (1750 words) Essay
Essay title: Critically discuss the following: Whilst early childhood education and care policy took a central place under New L
In the area of Childhood Education, the New Labour party promised to focus in an all-inclusive system that would promote a higher quality education for children throughout the United Kingdom. However, critics of the New Labour's policies in childhood education argue that the only changes that have come up relate to cost cutting and targeting and this has not really gone so well in promoting quality education.
12 pages (3000 words) Essay
Interest Rates Essay
Secondly, lending money is the most risky business because the future is never certain and continuously evolves and hence no one can see the future it is imperative that lenders get compensated for this uncertainty in the form of interest on the money that they are lending.
2 pages (500 words) Essay
Interest Rates
Such a fixed rate of return was received by the creditor after a year. At the time of introduction of coins, money in the early stages of history was loaned at a fixed rate of interest. We, however, discover one distinctive feature that the interest was abhorred in early stages to present day, and was considered as curse for the growth of economic activities in the underdeveloped countries.
8 pages (2000 words) Essay
European Central Bank Essay
The reaction of the markets to this step of ECB was hardly typical as the shares prices rose and euro declined against the dollar within several days after announcement about the rising of the interest rates had been made (However, the reaction of American markets was more typical one as the Dow Jones Stock Index of 600 major European companies fell by 2 points within the several days after the announcement had been made).
4 pages (1000 words) Essay
The determinants of the rate of interest and the significance of interest rates to policy makers and other economic actors
A lot of investment goes into the purchase of capital goods and the most integral thing here is funds. Funds is also called as financial capital, The supplier of this financial capital to the entrepreneur so that he may invest it in real capital assets like machinery and others, will be paid on the market rate of interest by the entrepreneur.
13 pages (3250 words) Essay
Why is money supply not under the tight control of central banks Essay
It does not compete with other banks for ordinary business transactions but however ensures a fair play (Black 2000, Visser 2005, Smullen & Hand 2005). Example of central banks includes the bank of England. An on going debate between businesses and politicians, not noticeably contradicted by academics, is that one of the main functions, or the main function, of the central bank is to analyse the progress of the economy, and then to steer it with skilful judgment towards health and growth, by making decisions to change their base interest rate, with carefully chosen timing, amount and direction.
6 pages (1500 words) Essay
INTEREST GROUP AND POLICY ESSAY
In a nut shell, domestic policy entails setting laws and regulations to govern the internal affairs of the nation (Steffen Schmidt et al 2012-2013). The domestic policies are regulatory, redistributive and promotional policy. In setting the
3 pages (750 words) Essay
Term Structure of Interest Rates
The outline looks at this theory and how it does apply to the market. ii. It assumes a comparatively small number of long-term investors. This is to offer premiums to encourage the number of long-term investors ( Gibson, Rajna,
2 pages (500 words) Essay
Hire a pro to write
a paper under your requirements!
Win a special DISCOUNT!
Put in your e-mail and click the button with your lucky finger
Your email
YOUR PRIZE:
Apply my DISCOUNT
Comments (0)
Click to create a comment