Impact of Low Interest Rates.edited.docx

However currently the policy does more damage than

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great recession. However, currently, the policy does more damage than good by leading the worldwide economy into the subsequent Great Recession. The policy undermines the existence of traditional banking systems, especially the interest rates which were the source of profits for the banking enterprises. Notably, the wealth effect theory suggests that when the value of a commodity increase, individuals are more likely to feel confident and comfortable in regards to their wealth, consequently, increasing their expenditures. A low-interest policy might exasperate the recession since it will make individuals lose confidence in the value of their wealth, which will translate to a decrease in the level of expenditure. C. I disagree with the statement that monitory policies do nothing but create bubbles in the economy. This is due to the fact that the policies aid in stabilizing the prices of
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IMPACT OF LOW-INTEREST RATES 3 different currencies in order to avoid cases of prolonged deflation and inflation. The low- interest rate environment of the ‘post dot com’ bubble day contributed to the housing bubble by providing easy credit, which consequently leads to the inflation of the housing prices. Apparently, I foresee another housing bubble in the economy where there will be an increase in the demand of mortgages whereas the supply will decrease (Wu & Xia, 2016). However, with the decrease in interest rates, more people will be able to afford the rent hence an increase in the price of the mortgages beyond the earlier actual price.
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IMPACT OF LOW-INTEREST RATES 4 References Dell Ariccia, G., Laeven, L., & Marquez, R. (2014). Real interest rates, leverage, and bank risk- ʼ taking. Journal of Economic Theory , 149 , 65-99. Wu, J. C., & Xia, F. D. (2016). Measuring the macroeconomic impact of monetary policy at the zero lower bound. Journal of Money, Credit and Banking , 48 (2-3), 253-291.
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Christopher Reinemann
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