4.4 - Quantitative Easing

Question 1

What is the main aim of quantitative easing?

Answer 1

Improve money supply
Alternative to cutting IR

Question 2

How does QE work?

Answer 2

Introduction of new money by Central Bank
Central Bank creates new money
Buys assets (Bonds etc)

Question 3

How does QE affect bonds?

Answer 3

Increased demand
Higher price
Lower yield

Question 4

Explain QE in simple terms

Answer 4

Central bank buys bonds
Raises demand, price
Lowers yield
Bond owners sell
Bonds replaced by cash flow
Increases liquidity

Question 5

What are the 4 intended effects of QE?

Answer 5

Wealth
Borrowing Cost
Lending
Currency

Question 6

What is the wealth effect?

Answer 6

Lower yields lead to higher bond + share prices

Question 7

What is the borrowing cost effect?

Answer 7

Lowers IR on long term debts
Govt bonds, mortgages etc

Question 8

What is the lending effect?

Answer 8

Increases liquidity of banks
Improves lending
Lifts incomes + spending

Question 9

What is the currency effect?

Answer 9

Lower IR
Has effect of ER depreciation
Helps exports

Question 10

What is the opposite of QE?

Answer 10

Quantitative tightening
Reduce money + credit supply