AS/A2 Economics: Quantitative Easing

Sunday 2 May 2010

What is quantitative easing

Examine e the likely effect of quantitative easing on the UK Economy?

How will QE affect exchange rates?

Anonymous said...: What is quantitative easing?

A process of increasing the money supply, typically only seen when interest rates have already been reduced to zero.

Examine the likely effect of quantitative easing on the UK Economy?

In theory Quantitatitve easing supposed to have two effects. One of them is direct effect on the banks’ bank accounts by providing more money. So that the banks may decide to lend more to businesses and individuals. Therefore it might increase of activity in the economy that way. Another effect is through the effect on the cost of borrowing. When the Bank buys bonds, it reduces the supply of those bonds in the economy. That should increase the demand for new bonds and, at the same time, make it cheaper for businesses to borrow.However only the 0.1% growth recorded for the final three months of 2009 was unconvincing. Also conditions for lending in UK, especially to small and medium-sized businesses, are still much weaker than [the Bank] would have wanted. One of the reasons of QE was ecouraging lending but there are signs that it has helped the financial markets by keeping down the interest rate on government bonds.

How will QE affect exchange rates?

It is hard to estimate how much money needed for economy. Otherwise too big supply might cause devaluation of the currency within a country and against other currencies as well. In the other hand small amount might not give expecting results or results at all.; 2 May 2010 at 20:15

AS/A2 Economics