More reserves are held in their account at the central bank. With these additional reserves, they can expand credit and create more money. (Bagus 2011) The FED is more passionate than the ECB about cutting interest rates to boost the economy. The ECB main goal is to keep inflation low, while the FED fights a double battle with not only fighting inflation but also unemployment. More things can affect how the ECB reacts when I comes to inflation and mostly targets a broader price index that includes things that doesn’t bother the FEDs as much, such as the Libya-related oil spike in 2011.
Banks have a reserve requirement, which is set by the fed. A reserve requirement is the minimum percentage of a bank’s total reserves that they are required to keep, for security reasons. (Schiller) The fed can change the reserve requirement to allow a bank to loan more/less money, which is used to control the economy. Many critics use this to determine that annual deficit spending has a negative impact on the economic stability of our country. The fed has to set a lower reserve requirement, which allows banks to loan out more money, which generates more interest, which could lead to periods of inflation and could have worse consequences if the government does not react quickly enough.
Explain how monetary policy can raise the level of aggregate demand in the short run. Dicuss the relevance of your answer for the UK since 2009. Monetary policy is the government or the central bank takes measures to influence the economic activities, especially refers to control of money supply , regulation of interest rate and some other control measures(Michael Woodford,2009). The central bank uses a series of measures, such as regulation of money supply, interest rates and the degree of the supply of credit in economic, to impact on total demand indirectly. At last, achieve aggregate demand and aggregate supply to be an ideal balance.
Before we explore how a reduction in the interest rates leads to an increase in consumption we must first define what it exactly means to consume. Mainstream economists such as Tim Harford define consumption as the spending by house holds on consumer products and services. As the interest rate decreases it leads to consequential reactions on behalf of consumers, one of these actions is an increase in the level of goods consumed. This is a result of it being cheaper to borrow money from banks and other financial institutions, this meaning purchases which have been prolonged or “put off” by consumers can now be readily purchased. This is an effect of a lower opportunity cost as the overall cost associated with borrowing has decreased and the marginal benefit of saving has increased, meaning consumers will receive more of a benefit if they purchase goods on credit based agreements opposed to saving, leading to an increase in the amount of credit transactions.
Demand side policies are those that manipulate the level of aggregate demand (AD) to achieve one or more economic objective. The policies can be fiscal policies (changes in government spending and/or taxation), or they might be monetary policies (which are largely changes in the short-term rate of interest). The four major macroeconomic objectives are a sustainable level of economic growth; low inflation; low unemployment; and a medium term balance on current account. Recently the government have used loose fiscal policy and the MPC have reduced the rate of interest. These are designed to increase the level of AD and increase in national income.
However, both monetary and fiscal policy may be used to influence the performance of the economy in the short run. In general, expansionary monetary policy is expected to improve the economy's rate of growth of output (measured by Gross Domestic Product or GDP) in the quarters ahead; tight or contractionary monetary policy is designed to slow the economy in the future to offset inflationary pressures. Likewise, expansionary fiscal policies, tax cuts, and spending increases are normally expected to stimulate economic growth in the short run, while contractionary fiscal policy, tax increases and spending cuts tend to slow the rate of future economic expansion. Question 2 The workings of Monetary and fiscal policy The aim of all governments is to achieve and maintain economic growth and price stability. However, when the economy is in an inflationary situation, there is the need to implement policies to reverse this trend; these policies are referred to as contractionary fiscal policies.
Dichele Parker Introduction to Business Controversial Issue Project – Does Government Spending Help Alleviate Our Recession? From the research I have done my theory is that the government not only can help, but can alleviate the current recession we are in. In the course of a recession, a government can try to increase economic growth, employment and motivate the economy by spending the taxpayer’s money on government plans. This approach is based on Keynesian economics, famously utilized in Franklin Roosevelt’s New Deal in 1937 during the great depression, and now resurfacing in the eye of our global crisis. Economic growth is defined as the increase in the quality and quantity of goods and services, which results in hundreds of thousands of entrepreneurs hiring more workers, presenting technological innovations and improving worker productivity.
There are several ways in which changes in interest rates influence aggregate demand, one of the main changes are through the housing market & house prices. For example higher interest rates increase the cost of mortgages and eventually reduce the demand for most types of housing. This will slow down the growth of household wealth and put a squeeze on equity withdrawal (consumers borrowing off the back of rising house prices) which adds directly to consumer spending and can fuel inflation. Another situation where the monetary policy increases AD is through disposable incomes of mortgage payers. For example, if interest rates increase, the income of homeowners who have variable-rate mortgages will fall – leading to a decline in their effective purchasing power.
Who should lead the way for Pan-Europa? They should incorporate strategies that would increase their stock price. Due to low stock prices, raiders are buying the stocks. They should increase net income and gross sales to drive up the stock price. They should reduce their debt due to high debt to equity ratio and capitalize on their increased market share.
There are two types of Fiscal policy put in place to alter the level of aggregate demand; Expansionary fiscal policy and Contractionary fiscal policy. When an economy is in a recession, expansionary fiscal policy is in order. Typically this type of fiscal policy results in increased government spending and/ or lower taxes. A recession results in a recessionary gap meaning that aggregate demand is at a level lower than it would be in a full employment situation. In order to close this gap, a government will typically increase their spending which will directly increase the aggregate demand curve (since government spending creates demand for goods and services).