Ia Commentary

Monetary policy, is the actions of a central bank, currency board or other regulatory committee that determine the size and rate of growth of the money supply, which in turn affects interest rates. Monetary policy is maintained through actions such as increasing the interest rate, or changing the amount of money banks need to keep in the bank reserves. The European Central Bank (ECB) is currently taking part in monetary policy in which they bought government securities from the Spanish and Italian governments. The whole purpose behind the ECB’s actions was to bring down the interest rates on Italian and Spanish government securities which would then lead investors to believe that Italy and Spain would have the funds to be able to pay them back and as a result reducing interest rates in the Eurozone.
P-Level
P-Level
FE
FE
MS2
MS2
MS1
MS1
The ECB bought government securities from European governments, which I turn successfully increased the supply of money in Europe which then lead investors to begin withdrawing capital at an accelerating pace from Spain and Italy. This moved the Eurozone economy closer to its full employment equilibrium where labor, land, and capital are used to its full potential. The ECB’s bond purchases made it cheaper for Italy and Spain to borrow, lowering the interest rates on their bond market, influencing investors to invest back into the economy, making them keener to save and invest their money in Italy and Spain.
Q2
Q2
Q1
Q1
Y2
Y2
Y1
Y1
RGDP
RGDP
PL1
PL1
PL2
PL2
AD2
AD2
AD1
AD1
SRAS
SRAS

i2
i2
i1
i1


The incursion of money supplied into these economies (shown as an increase in the supply of money from MS1 to MS2) should bring down the real interest rate, prompting more businesses to invest in capital and more households to increase in the consumption of goods, increasing aggregate demand and moving the Eurozone economy back towards its full employment equilibrium (from AD1 to AD2).
In cases as so...