Macro Economics - Assignment Example

Discussion of the current event 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 investors cheered the likelihood of new stimulus measures from the ECB. The rise in European stocks has paved the way for stocks to regain the losses suffered last week amid concerns about growth of the global economy.

The benchmark Stoxx Europe 600 went up 2.1 percent to around 323.74, which is the highest since 10th October 2014. 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.Analysis using IS-LM modelThe 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.

BibliographyCox, 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, 2014)