Things To Wrap Head Around

Question 1

Why is QE used?

Answer 1

To stimulate aggregate demand if monetary policy has failed.
If confidence is low so people borrow less/less willingness to give out loans

Question 2

What does QE do?

Answer 2

Increases the money in the economy (subtley)

Question 3

Step 1 of QE

Answer 3

Central bank makes money electronically

Question 4

Step 2 QE

Answer 4

That money is used to buy Gov Bonds from financial institutions

Question 5

Step 3 QE

Answer 5

Price of gov bonds ^ , and yield falls

Question 6

Step 4 QE

Answer 6

Financial institutions either loan this money out or invest it in riskier corporate bonds
(This boosts AD through increased consumption or the wealth affect respectively)

Question 7

Step 5 QE

Answer 7

The price of corporate bonds rises which means the yield falls, which reduces the cost of borroeing

Question 8

Step 6 QE

Answer 8

Access to credit improves, general interest rates fall and the willingness to lend should rise at lower interest rates

Question 9

Step 7

Answer 9

Borrowing should have been stimulated aswel as spending and investment (AD^GROWTH^)

Question 10

Eval of QE

Answer 10

Risk of being inflationary