4.4 - Quantitative Easing Flashcards

1
Q

What is the main aim of quantitative easing?

A

Improve money supply
Alternative to cutting IR

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2
Q

How does QE work?

A

Introduction of new money by Central Bank
Central Bank creates new money
Buys assets (Bonds etc)

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3
Q

How does QE affect bonds?

A

Increased demand
Higher price
Lower yield

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4
Q

Explain QE in simple terms

A

Central bank buys bonds
Raises demand, price
Lowers yield
Bond owners sell
Bonds replaced by cash flow
Increases liquidity

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5
Q

What are the 4 intended effects of QE?

A

Wealth
Borrowing Cost
Lending
Currency

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6
Q

What is the wealth effect?

A

Lower yields lead to higher bond + share prices

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7
Q

What is the borrowing cost effect?

A

Lowers IR on long term debts
Govt bonds, mortgages etc

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8
Q

What is the lending effect?

A

Increases liquidity of banks
Improves lending
Lifts incomes + spending

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9
Q

What is the currency effect?

A

Lower IR
Has effect of ER depreciation
Helps exports

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10
Q

What is the opposite of QE?

A

Quantitative tightening
Reduce money + credit supply

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