Quantitative Easing

Question 1

When was QE introduced to the UK?

Answer 1

2009

Question 2

Explain the process of QE

Answer 2

1. Central bank creates money electronically
2. Central bank uses this money to buy financial assets e.g. Govt bonds
3. More demand for bonds increases prices and lowers yields
4. Lower yield leads to fall in long-term interest rates e.g. mortgages
5. Lower interest rates leads to increased borrowing (consumption) and investment - AD shifts right

Question 3

What are the main benefits of QE?

Answer 3

• Increased money supply
• Lower interest rates
• Boosts AD ( C + I )

Question 4

Evaluation for QE

Answer 4

• Lowering interest rates alone wasnt be enough to boost AD during financial crisis as confidence was low - there’s evidence QE made a difference
• Increased money supply more effective
• Overall, without QE, AD may fall - leads to less GDP and deflation

Question 5

Evaluation against QE

Answer 5

• QE has led to wider income and wealth inequality - due to asset-price inflation as financial institutions use created money to buy assets which increases their prices. This only benefits rich with bonds and shares
• Depends on level of consumer and business confidence - people may still not decide to borrow or invest regardless of low interest

Question 6

What the 4 types of effects of QE?

Answer 6

Wealth Effect
More demand for assets increase their prices - holders of assets experience and increase in their wealth - raising confidence and stimulating spending

Borrowing effect
Lower interest rates on long term debts e.g. mortgages

Lending effect
QE increases liquidity of banks and increased lending can lead to more investment

Currency effect
Lower interest causes outflow of hot money - less demand for currency - currency depreciates - exports cheaper and more competitive