THEME 2 STEEDS (part 2)

Question 1

what is the multiplier

Answer 1

initial increase in AD leads to a much bigger increase in total output

Question 2

how do you calculate the multiplier

Answer 2

1/1-MPC or 1/MPS or 1/MPW

Question 3

what adds up to make MPW mean in terms of the multiplier

Answer 3

MPS+MPT+MPM

Question 4

1st stage of QE

Answer 4

Central bank creates new money electrically by adding money to their balance sheet. This money is then used to buy financial assets

Question 5

2nd stage of QE

Answer 5

More demand leads to higher prices for assets. Rise in price of bonds leads to lower yield (%) on bonds

Question 6

3rd stage of QE

Answer 6

The effects of QE can then cause a fall in long term interest rates

Question 7

4th stage of QE

Answer 7

Lower interest rates and increased cash in the banking system should stimulate AD through a rise in consumption and investment.

Question 8

5th stage of QE

Answer 8

Extensive QE also works through the exchange rate-lower yields on assets usually causes a currency depreciation

Question 9

positives of QE

Answer 9

-increased lending increases AD.
-less mortgage rates
-increased investment
-greater confidence
-avoids deflation

Question 10

negatives of QE

Answer 10

-high income borrow money and improve wealth therefore the don’t spend it
-unwillingness of commercial banks to lend
-low consumer confidence

Question 11

what are interest rates

Answer 11

cost of borrowing and return of savings

Question 12

what is quantitative tightening

Answer 12

selling government bonds back to banks/central bank who lets bonds mature and then removing them from their balance sheet

Question 13

what happens if the central bank doesn’t want to buy bonds

Answer 13

bond prices might drop. yield % would increase, interest rates would increase (could include mortgage interest rates and high loan costs will lower demand for credit in the financial system)