Source: http://www.the-news.net/cgi-bin/google.pl?id=1000-1
Summary
The European Central Bank has announced a record low of 1.5 percent in interest rate. It was a half a percent drop. By this, The Bank of England hopes to stimulate the recessing economy. It has been the 5th cut in the last 6 months. By this summer, some analysts are predicting an interest rate cut to below one percent. Not only has the Bank of England announced a cut, the Bank of Canada has also declared a half percent cut too. These interest rates are both record low for the two major banks. The low interest rates are hope to encourage the public to spend money in the economy.
Connection
The connection between this article and Chapter 6 is disposable income and interest rate. With the record low interest rate cut to 1.5%, Bank of England hopes this would influence the consumers to borrow money. In order for companies to buy new equipment, many businesses are forced to borrow money. If the interest rates are low, it encourages borrowing; therefore, increases the level of investment spending. In addition, the cost of borrowing is less and the opportunity cost of not saving is also less. Home owners in Europe can have more disposable income from this cut after making their mortgage repayments. If you look at the current recession, people’s amount of savings is greater than the amount of investment. Hence, this would cause the GDP to decline and to not balance.
Reflection
In the current condition of the economy, many countries are thinking ways to stimulate it. European nations are trying to influence businesses and consumers to spend their money. Lowering the interest rates is one of the ways to help the nation’s economy. I believe there is an effect of expectation factor which is causing the level of consumption to decrease. Many people are having household savings instead of investments. This affects the circular flow of money, resulting in a recessing economy. Overall, I agree in lowering the interest rates to encourage the public to spend their money. With people spending their money, the economy will hopefully turn around.
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2 comments:
I agree that lowering interest rates would help stimulate the economy. With these lower numbers, citizens would be discouraged put their moneys in banks as savings and would rather spend them because of the low interest rate. Also beneficial to major companies who borrow loans from the bank, these low interest rates would encourage further borrowing as the rates are less hefty as before.
Although there is a disincentive to save now, that does not mean that people will spend. Just because the banks have took away the option to save, doesn't mean people will spend their money right away.
Jason Choy
Block F
Since we are in recession now, the amount of money saved is greater the amount of money invested. That is why we have a low GDP. Low interest rate is a way to encourage spending. With low interest rate, hopefully households will spend their money instead of saving, because they cannot really earn anything from saving the money in the bank. With low interest rate, hopefully businesses will borrow money and decide to buy more machines, which is a way of investment. In my opinion, low interest rate will not have much effect on economic compare to government spending. If government spending increases by creating more job opportunities, unemployment rate will decrease and households will have more money to spend. As soon as the level of spending increase, things will turn around and recession will be recover.
By Jenny Zhang
Block E
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