Quantitative Easing

Question 1

How does Quantitative easing work?

Answer 1

QE purchases made by the asset purchase facility, which has a separate balance sheet from the central bank.

Question 2

Bank of England assets

Answer 2

Loan from the BOE to the APF.

This is creating new money.

Question 3

Bank of England liabilities

Answer 3

APF reserve account.

Question 4

APF assets

Answer 4

QE purchases

Question 5

APF liabilities

Answer 5

Loan from BOE to APF

Question 6

What are the main effects of QE?

Answer 6

1. Higher asset prices (bc demand goes up).

2. Lower asset yields (bc lower interest rates).

Question 7

Why does QE lead to a lower bond yield?

Answer 7

Current Yield=
Coupon Payment /Market Price

When QE is implemented, the demand rises for bonds. This pushes up the price, causing the yield to fall.

Question 8

QE and the Yield Curve

Answer 8

QE aims to flatten the slope of the yield curve (curve pivots inwards).

Question 9

Impacts of QE

Answer 9

QE1’s £200 billion increased GDP by 1.5%-2% and inflation by 0.75-1.5%.