Question

Consider the existing economic conditions, including inflation and economic growth. The inflation rate is forecasted to be 0.5% and the growth rate of GDP is forecasted to be 1% for the next three months. Present a cogent argument to support your views on whether the Central Bank should increase interest rates, reduce interest rates, or leave interest rates at their present levels?

Answer 1

Central bank should be decreasing the interest rate because projected growth rate of the economy has been very low and the inflation forecast in the economy has also been very low so Central Bank can adopt quantitative easing measures as quantitative easing measures will be focused upon cutting the interest rates in the economy which will be helpful in stimulation of the demand into the economy and it will be helpful in increasing of the inflation due to increase of the demand and increasing demand will also help in increase of the gross domestic production, so interest rate decrease is one of the tool which will be adopted by the Central Bank during such times of economic crisis when economic recovery is lower and there has been a sharp decrease in expectation of the growth rate and inflation.

Central bank should be decreasing the interest rates because it will be helpful in generation of demand through cutting of interest rate, & there will be stimulation of the demand in the economy and stimulation of demand will be leading to increase in the the inflation in the economy and it will be leading to increase in the Gross Domestic Product so it is a chain of multiple effect by cutting off the interest rate and Central Bank will be trying to cut the interest rate in order to revive the demand in the economy.