1.2.1 The Eurozone debt crisis did not stop the European Central Bank (ECB) raising interest rates twice in 2011 as it focused on the “day job” of fighting inflation. The central bank that sets monetary policy for the 17-country Eurozone lifted its benchmark rate by a further quarter of a point to 1.5% at its July 2011 meeting in Frankfurt. Since the 09 November 2011 however the ECB has been on a course of gradually reducing interest rates in response to the sluggish and often faltering growth witnessed in the Eurozone area. Even as recently as the 22 October 2015, the current ECB President Mario Draghi signaled that the bank is prepared to undertake another large stimulus package that could include more bond purchases and a cut to the already negative interest rate, as the Eurozone struggles with ultralow inflation and a tepid recovery.

Assuming that other interest rates also increased and then decreased along with the ECB rate, what effects do you think these moves have on investment spending in the economy? Explain your answer. What do you think the ECB’s objective was in increasing, and then decreasing, the ECB rate? When and why might the Fed decide to start raising the ECB rate?