Consider the following statements:

1. The concept of Helicopter money is used to boost demand in the economy.

2. Negative interest rates act as liability for the depositor and assets for the borrower.

Which of the statements given above is/are correct?

Solution

● Statement 1 is correct: The concept of Helicopter money was given by Milton Friedman and deals with the creation of demand in the economy thereby boasting its growth. In situations of slowdown or recession when the people are reluctant to buy then by infusing money in the economy by the Central Bank at zero interest rates would lead to creation of demand and hence revive growth. ● Statement 2 is correct: Providing negative interest rates on deposits acts as a liability for the depositor. If banks provide a negative interest rate on saving accounts instead of +3% (consider) interest, then depositors instead of earning interest would be liable to pay some of the deposits. In case of loans, the borrower benefits as the negative interest charged by the investor would cause the investor to not only lend the money but also pay some extra amount as interest.