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Low Interest Rates - PDF

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Added on  2020-11-30

Low Interest Rates - PDF

   Added on 2020-11-30

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Assignment 1 – Economics (Pablo Martinez)a) Please indicate the main pros and cons of low interest ratesInterest rates are used by central banks as a tool to control and manage the macro-economy. It is a reality that average interest rates in developed markets have decreased for the past 30 years. There are several advantages and disadvantages of having low interest rates. One of the main advantages that most people think of, in relation to low interest rates is its stimulative effect on economic activity. By reducing interest rates, central banks can increase the amount of long-term investments which further helps the economies long-term performance. For example, the number of mortgages tend to be higher whenever interest rates are lower. Therefore, low interest rates mean the cost of lending is lower, increasing aggregate demand in the economy. If aggregate demand increases then the price of assets will also increase, and people will be more wealthy and there will be lower cost of financing capital purchase for businesses. Furthermore, farmers and businessmen tend gain from lower interest rates as they are encouraged to invest in large equipment and machinery whenever interest rates are low.However, there are also some constraints in relation to low interest rates. One of them, is that low interest rates tend to increase aggregate demand, resulting in an increase in inflation. Furthermore, those in the economy who rely in interest income will suffer if interest rates prevail in the long-run. An extreme argument against low interest rates is the idea of St. Louis Fed President James Bullard that central banks promise to maintain low interest rates in time, may lead to the deflation established in Japan. b) Is it possible to see higher interest rates in the Eurozone in the mid-term? (reply approx. 100 words)The impact of the coronavirus on the economy has further depressed nominal interest rates and inflation. There has been a general decrease in consumption and investment,and central banks have used their tools to reduce the cost of money and offer as much liquidity as necessary to control the decrease in prices. One of the options is that in themedium term the central banks decide to raise interest rates to control inflation that may occur whenever the coronavirus crises is over. However, as a result of the coronavirus, private saving could probably increase, and central banks may decide to lower interest rates in order to stimulate the economy.
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