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Introductory Economics (Macroeconomics) - Essay Example

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In the contemporary era, the central bank is considered as the pivotal institution determining the scope and scale of economic transactions undertaken by a…
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Introductory Economics (Macroeconomics)
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Introductory Economics (Macroeconomics)

Download file to see previous pages... If interest rates are forecasted to be low in an economy, then it makes productive investors believe that in the long run, cost of borrowing funds would be less. Under such circumstances, the rate of investments made in an economy would increase and level of economic productivity would also rise. Finally, a rise in the domestic product of a nation simply indicates a fall in unemployment rates. The Bank of England initially claimed under the regime of Forward Guidance Policy that it would not increase the lending interest rate above .5% in the long run, until the unemployment level in the country falls to 7% or below (BBC, 2014). Accordingly, such claims made by the Bank had succeeded in lowering the level of volatility in the market as well as enhancing the level of investments made in the country (BBC, 2014).
Nonetheless, governor of the bank had mentioned that it was required to revise the Forward Guidance Policy because such forecasts would generate excessive job opportunities in the nation, that would automatically increase the amount of money and hence, demand in the economy; ultimately carving the path of inflation in the long run (Howker and Malik, 2010). The Bank also claimed that in its revised Forward Guidance Policy, it would forecast several macroeconomic factors, apart from unemployment and interest rate. The bank asserted that it would increase the interest rate to 2% to stabilize the unusual growth of employments in the nation. Although Mark Carney claimed that the country would experience high growth from 2.8% to 3.4% in the recent years, he also added that the growth was “neither balanced nor sustainable” and way below the pre-financial crisis levels (BBC, 2014). With reference to such revised estimates for future, the risk adverse attitude of investors in the nation would fall to some extent. They would realize that they had overestimated stability of the economy ...Download file to see next pagesRead More
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