Quantitative easing

Question 1

when is quantitative easing used

Answer 1

when traditional approaches to monetary policcy have failed

Question 2

why might monetary policy have failed

Answer 2

• eg increasing IR (failed in the great recession of 2009 when UK lowered interest rates to 0.5%
• may fail because of the low availability of credit, ther access of finance for commercial banks was low, finding it hard to raise finance to issue out loans
• consumer and business confidence was low - they were not v willing to borrow
• bands were less willing to lend money

Question 3

how does quantitative easing work

Answer 3

1. central bank creates money electronically and puts that extra money on its balance sheet
2. the money is used to buy financial assets from financial institutions, eg assests like govt bonds (the idea was to disincentivise ppl w money to buy these govt bonds, take them away, and give the suppliers institutions money
3. increased demand for govt bonds as central bank buying more of them, this pushes up their prices
   
   • as price of bond goes up, yield/IR goes down
4. financial institutions either loan this money out or invest in riskier corporate bonds or shares
5. prices of corporate bond increases as greater demand, IR decreases, accessing finance becomes cheaper and reduces cost of borrowing money
6. access to credit improves, general interest rates fall, increased incentive to lend at lower interest rates
7. stimulates borrowing, investment and spending, increased AD and growth

Question 4

what does the interest rate on a government bond represent

Answer 4

the return for an investor but the cost of borrowing to the issuer

Question 5

how does the govt bond prices impact different groups

Answer 5

the government - issuing money is cheaper now because yields are falling
- firms - for ppl and investors, yield is lower so there is a reduced incentive to hold government bonds