Econ 101 (Part 2)

Question 1

Asset Purchasing Program (APP)

Answer 1

“Asset Purchasing Program” is another term for “Quantitative Easing”

The ECB’s Asset Purchase Program (APP) is part of a package of non-standard monetary policy measures that also includes targeted longer-term refinancing operations, and which was initiated in mid-2014 to support the monetary policy transmission mechanism and provide the amount of policy accommodation needed to ensure price stability.

Question 2

Quantitative Easing

Answer 2

A monetary policy whereby a central bank buys government bonds or other financial assets in order to inject money into the economy to expand economic activity. An unconventional form of monetary policy, it is usually used when inflation is very low or negative, and standard expansionary monetary policy has become ineffective. A central bank implements quantitative easing by buying financial assets from commercial banks and other financial institutions, thus raising the prices of those financial assets and lowering their yield, while simultaneously increasing the money supply. This differs from the more usual policy of buying or selling short-term government bonds to keep interbank interest rates at a specified target value.

Expansionary monetary policy to stimulate the economy typically involves the central bank buying short-term government bonds to decrease short-term market interest rates. However, when short-term interest rates approach or reach zero, this method can no longer work (a situation known as a liquidity trap). In such circumstances, monetary authorities may then use quantitative easing to further stimulate the economy, by buying financial assets without reference to interest rates, and by buying riskier or longer maturity assets (other than short-term government bonds), thereby lowering interest rates further out on the yield curve.

Quantitative easing can help bring the economy out of recession and help ensure that inflation does not fall below the central bank’s inflation target. Risks include the policy being more effective than intended in acting against deflation (leading to higher inflation in the longer term), or not being effective enough if banks remain reluctant to lend and potential borrowers are unwilling to borrow. According to the International Monetary Fund, the US Federal Reserve System, and various other economists, quantitative easing undertaken following the global financial crisis of 2007–08 mitigated some of the economic problems after the crisis. It has also been used by several major central banks (Federal Reserve, European Central Bank and Bank of England) in response to the COVID-19 pandemic.

Question 3

Open Market Operations

Answer 3

Open market operations (OMO) refers to a central bank buying or selling short-term Treasuries in the open market in order to influence the money supply, thus influencing short term interest rates.

Buying securities adds money to the system, making loans easier to obtain and interest rates decline.

Selling securities from the central bank’s balance sheet removes money from the system, making loans more expensive and increasing rates.

These open market operations are the method the Fed uses to manipulate interest rates – typically to keep overnight lending within a set policy band.

Question 4

Difference between Open Market Operations and Quantitative Easing

Answer 4

Open Market Operations is really a TACTIC that can be used in an overall STRATEGY of Quantitative Easing.

Question 5

High Beta

Answer 5

A High Beta Index, for example, is a basket of stocks that exhibit greater volatility than a broad market index like the S&P 500.

A High Beta currency would be on that exhibits greater volatitlity than a broad basket of currencies.