The Tools That Are Used By the European Central Bank (ECB) To Increase Essay

The Tools That Are Used By the European Central Bank (ECB) To Increase the Money Supply in the Economy - Essay Example This paper illustrates that the European central bank may use buying securities as a tool to increase the money supply in the euro area. This is through the open market operations. The ECB may affect the supply of money through selling or buying the European government securities, by the use of open market open market operations. When the ECB purchases the government securities from the general public, it will do so using the money that was not in existence in the system. This will make the bank reserves to increase or rise and in turn, will make the money supply to increase. For example, when the European Central Bank has an open market operation through buying or selling government securities and when it purchase these government securities from the public, it does so using the nonexistent money. Consequently, this makes the reserves in the bank to rise, and as a result, this increases the supply of money. The European central bank may increase the supply of the money by making the reserve rate to be lower. The ECB can do this through the formulae of the Required Reserve Ratio. Through this ratio, banks are able to know the required and specific amount which they must hold as the reserve through all the deposits and have limits to the amount that the banks will lend out to its customers. If this ratio is increased by the ECB, the money deposits will have to be few, therefore further limiting the amount available to the public. The European Central Bank may decrease the discount rate so as to increase the money supply. For example, banks may have to borrow funds when they need them. If the banks borrow from the ECB, an interest rate will be paid which is known as Discount rate. Another tool that can be used by the ECB to increase the supply of money in the economy is the publishing or producing of more money. Though the ECB may decide to increase the money supply in the economy through the selling of securities to the public, a majority of the public prefer ho arding money thus the money in circulation becomes less. It is for this reason and may be less availability of money that the ECB may decide to publish more money to increase the money supply in the economy.