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Macro Economics - Assignment Example

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The European stocks have risen up and European Central Bank (ECB) is considering buying corporate bonds to increase the quantity of money in the economy. On Tuesday October 21, 2014, the European stocks recorded their second-largest daily gain of the year. This is because the…
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Macro Economics
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Macro Economics

Download file to see previous pages... The ECB is thinking of buying corporate bonds as an option if it believes that more measures are needed to increase money into the European economy. Though such an idea does not seem to be imminent, investors snapped up stocks and sold the euro based on ECB’s thinking.
Investors are moved by signs that ECB is considering more policy measures to increase money in the European economy if current measures such as low interest rates, new bank lending facility as well as a program to buy particular types of debts fail to boost economic growth and inflation. France’s CAC 40 went up by 2.3 percent and Germany’s DA rose by 1.9 percent. In the same vein, Spanish stock rose by 2.4 percent and Italian stock went up by 2.8 percent.
The ECB’s current initiatives are geared toward adding money supply to the economy by increasing the amount of assets on its books. ECB creates new bank reserves by printing money to purchase assets.
The graph below shows there is a decrease in money supplied in the European economy. The European Central Bank (ECB) has to put into play policy measures that will move the graph to the right as shown by the arrow. These measures include low interest rates, buying of corporate bonds as well as new bank lending facility which will add money to the economy and push the graph to the right in order to boost economic growth and inflation. The nominal interest rate must decrease to encourage the demand for money back to the equilibrium. It is worth to note that an decrease in the nominal interest rate will decrease the demand for savings and so increase the demand for money.
Cox, Josie and Blackstone, Brian. “European Stocks Jump as ECB Mulls Buying Corporate Bonds” http://online.wsj.com/articles/european-stock-markets-edge-higher 1413878920?mod=WSJ_hp_LEFTWhatsNewsCollection (accessed October 21, ...Download file to see next pagesRead More
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