4.4 - Quantitative Easing Flashcards
What is the main aim of quantitative easing?
Improve money supply
Alternative to cutting IR
How does QE work?
Introduction of new money by Central Bank
Central Bank creates new money
Buys assets (Bonds etc)
How does QE affect bonds?
Increased demand
Higher price
Lower yield
Explain QE in simple terms
Central bank buys bonds
Raises demand, price
Lowers yield
Bond owners sell
Bonds replaced by cash flow
Increases liquidity
What are the 4 intended effects of QE?
Wealth
Borrowing Cost
Lending
Currency
What is the wealth effect?
Lower yields lead to higher bond + share prices
What is the borrowing cost effect?
Lowers IR on long term debts
Govt bonds, mortgages etc
What is the lending effect?
Increases liquidity of banks
Improves lending
Lifts incomes + spending
What is the currency effect?
Lower IR
Has effect of ER depreciation
Helps exports
What is the opposite of QE?
Quantitative tightening
Reduce money + credit supply