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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
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Since the time of King William of Orange, central banks around the world have become influential and important for functioning of the economy and countrywide security and welfare. As importance of the government for the welfare of all citizens increased, so did the central bank’s importance (Cechetti & Schoenholtz, 2011, Chapter 15).
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.
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).
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.
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.
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.
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).
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.
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,
Firstly, the rate of interest on bonds with different maturities has a tendency to move together with time. Secondly, the yield curve can
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