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The Eurozone economy Figure 1: Exchange rate of the euro (€) to the British pound (£) Figure 2: Eurozone inflation rate as measured by the Consumer Prices Index (CPI) Extract A European Central Bank disappoints markets with weaker than expected stimulus Mario Draghi, president of the European Central Bank (ECB), surprised financial markets in November 2015 with a less ambitious package of monetary stimulus than many had anticipated - Edexcel - A-Level Economics A - Question 6 - 2017 - Paper 2
Question 6
The Eurozone economy Figure 1: Exchange rate of the euro (€) to the British pound (£) Figure 2: Eurozone inflation rate as measured by the Consumer Prices Index (C... show full transcript
Worked Solution & Example Answer:The Eurozone economy Figure 1: Exchange rate of the euro (€) to the British pound (£) Figure 2: Eurozone inflation rate as measured by the Consumer Prices Index (CPI) Extract A European Central Bank disappoints markets with weaker than expected stimulus Mario Draghi, president of the European Central Bank (ECB), surprised financial markets in November 2015 with a less ambitious package of monetary stimulus than many had anticipated - Edexcel - A-Level Economics A - Question 6 - 2017 - Paper 2
Step 1
Discuss the likely success of the ECB’s quantitative easing programme in moving Eurozone inflation closer to their target of 2%.
Answer
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The ECB’s quantitative easing (QE) programme aims to inject liquidity into the economy, thus stimulating lending and investment. Although this has the potential to increase inflation, the effectiveness of QE can be limited by factors such as a lack of confidence among consumers and firms.
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Furthermore, if the programme does not lead to increased spending but merely encourages saving, the desired inflationary effect may not materialize. Additionally, external factors like falling energy prices and global economic slowdowns have stifled inflation within the Eurozone, complicating the success of the ECB's strategies.
Step 2
Discuss 'looser fiscal policy' and 'supply-side reforms' that may be used by governments of Eurozone countries to increase economic growth.
Answer
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Looser Fiscal Policy:
Governments can utilize looser fiscal policy by increasing public spending or cutting taxes to boost economic activity. Increased government expenditure on infrastructure projects can stimulate demand, creating jobs and encouraging further spending. -
Supply-side Reforms:
These reforms aim at enhancing productivity by improving workforce skills and reducing regulatory barriers for businesses. For instance, investing in education to create a more skilled labor force can increase economic output. Implementing policies that encourage entrepreneurship can also spur growth by fostering innovation.