Th2.6: Benefits of Quantitative Easing

Question 1

What are the three benefits on quantitative easing?

Answer 1

asset prices rise
money supply increases
lower their interest rates

Question 2

APR: Why do asset prices rise?

Answer 2

since the bank is buying assets, there is a rise in demand

Question 3

APR: What does the prices of assets rising cause and why?

Answer 3

a positive wealth effect since shares, houses e.t.c are worth more so people will increase their consumption

Question 4

APR: How does this cause a positive wealth effect?

Answer 4

since shares

Question 5

APR: Why will the cost of borrowing decrease?

Answer 5

higher asset prices mean lower yields (money earned from assets), making it cheaper for households and businesses to finance spending

Question 6

MSI: How can an increase in the money supply increase AD?

Answer 6

private sector companies receive more money which they can spend on goods and services or other financial assets, which may increase investment or consumption therefore increasing AD

Question 7

MSI: What may it also push up further?

Answer 7

push asset prices up further

Question 8

MSI: How can both consumption and investment also increase?

Answer 8

banks have higher reserves, meaning they can increase their lending to households and businesses so both consumption and investment increase as people can buy on credit

Question 9

LIR: Why may commercial banks lower their interest rates?

Answer 9

they are receiving so much money from the Bank of England and so can offer very low interest deals to their consumers

Question 10

LIR: What will the increased money supply mean?

Answer 10

that the price of money falls - interest rates are the price of money

Question 11

LIR: How will this increase AD?

Answer 11

encourage borrowing and therefore increase investment and consumption

Question 12

LIR: What will happen if banks decide to lower their interest rates?

Answer 12

the same mechanisms will apply as those following a reduction in the base rate