The European Central Bank (ECB) was established following the decision of a number of European countries, including Germany, France and Italy, to adopt a common European currency.
Individual central banks had to relinquish their powers to manage money supply and set domestic interest rate levels. A few countries, such as the UK, opted out although in time that may well change.
There are clear advantages and disadvantages of having a common European currency. Cross-border transaction costs are reduced in part because there are no foreign exchange related charges for business conducted between members. Risks arising from companies having foreign exchange positions are also reduced. Business travelers and tourists in Europe no longer have to carry cash in a dozen different currencies.
The disadvantages stem from a lack of labor mobility and variations in national fiscal policies. In a unified economy such as the US workers will react to a downturn in one part of the country by moving to a part of the countr y with better economic prospects. This is much harder to accomplish in a continent with many different languages and where there is a limited tradition of cross-border labor movement.
National central banks’ ability to use monetary policy to influence economic growth, the level of unemployment and inflation have been largely subjugated to the ECB. They cannot cut interest rates, for example, to give a boost to a local economy in recession or hike rates to choke off inflation. The extent to which this lack of flexibility will result in future problems remains to be seen.
The ECB has specific quantitative inflation targets to meet but also has the power to take action against countries that fail to keep their government’s financing deficit as a percentage of GDP below a predetermined level.
Posts Tagged ‘mortgage’
The European Central Bank
Saturday, October 3rd, 2009Market supply schedule
Sunday, September 13th, 2009How will producer-entrepreneurs respond to a change in product price? Other things constant, a higher price will increase the producer’s incentive to supply the good. Established producers will expand the scale of their operations, and over time new entrepreneurs, seeking personal gain, will enter the market and begin supplying the product, too. The law ly states that there is a direct (or positive) relationship between the price of a good or service and the amount of it that suppliers are willing to produce. This direct relationship means that price and the quantity producers wish to supply move in the same direction. As the price increases, producers will supply more-and as the price decreases, they will supply less.
Like the law of demand, the law of supply reflects the basic economic principle that incentives matter. Higher prices increase the reward entrepreneurs get from selling their products. The more profitable producing a product becomes, the more of it they will be willing to supply. Conversely, as the price of a product falls, so does its profitability and the incentive to supply it. Just think about how many hours of tutoring services you would be willing to supply for different prices. Would you be willing to spend more time tutoring students if instead of $5 per hour, tutoring paid $50 per hour? The law of supply suggests you would, and producers of other goods and services are no different.
Because there is a direct relationship between a good’s price and the amount offered for sale by suppliers, the supply curve has a positive slope. It slopes upward to the right. Read horizontally, the supply curve shows how much of a particular good producers are willing to produce and sell at a given price. Read vertically, the supply curve reveals important information about the cost of production. The height of the supply curve indicates both (I) the minimum price necessary to induce producers to supply that additional unit and (2) the opportunity cost of producing that additional unit. These are both measured by the height of the supply curve because the minimum price required to induce a supplier to sell a unit is precisely the marginal cost of producing it.