Economic Growth And Its Effect On National Economic System

1861 WordsApr 6, 20178 Pages
Ever since negative interest rates scattered over European and later Japanese banks, there has been many arguments amongst economist about the impacts that it will have to our national economic system. Negative interest rates are when the central bank of a country charges commercial banks interest for borrowing money and for some countries, holding an account. In other words, lenders of the central banks are obligated to pay in order to keep funds safe with the central banks. In theory, negative interest rates are intended to simulate the economy by increasing lending, ultimately requiring these secondary banks to borrow more money. It increases economic growth by levying a tax on the large amount of reserves commercial banks hold. The…show more content…
This time is formally called deflationary periods, a time where homeowners and businesses tend to keep their money instead of spending it. This is done as an incentive to avoid experiencing what many individuals and businesses had to deal with during the Great Depression. The result of this is a collapse in the aggregate demand, causing prices to fall even more due to low real production. Prices decrease while unemployment increases, further hurting the economy. Even though there are policies reinforced to help stabilize these moments of economic stagnation (Expansionary Monetary Policy), if the forces of the deflation are in large numbers, the only way out may ultimately be abandoning the policies usually followed. The actions of the central banks are to keep inflation under control and to support economic growth and employment. This is where negative interest rates come into play. Picture yourself in this scenario. You’re a public bank in the U.S borrowing money from the federal reserve and lending money out to homeowners throughout the country. Would you lend more money if you were getting charged more for borrowing than what you were receiving from lending? Probably not, yet many people would be surprised to know the European central bank has adopted this method in order to try to protect its currency against others. This is called setting negative interest rates. As crazy and unwise as it sounds, several of Europe’s

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