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The European Central Bank introduced a new round of quantitative easing (QE) in March 2020, purchasing up to €750 billion of assets - Edexcel - A-Level Economics A - Question 7 - 2021 - Paper 2
Question 7
The European Central Bank introduced a new round of quantitative easing (QE) in March 2020, purchasing up to €750 billion of assets. The objective of this QE was to ... show full transcript
Worked Solution & Example Answer:The European Central Bank introduced a new round of quantitative easing (QE) in March 2020, purchasing up to €750 billion of assets - Edexcel - A-Level Economics A - Question 7 - 2021 - Paper 2
Step 1
Arguments that QE has been effective
Answer
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Increased Lending: QE provided financial institutions with additional funding, allowing them to increase lending to businesses. This increased investment can stimulate economic growth as businesses expand and create more jobs.
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Consumer Lending and Spending: By providing financial institutions with the necessary funds, QE facilitated increased lending to consumers as well. This led to higher consumption levels in the economy, boosting demand for goods and services and aiding economic recovery.
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Counteracting Deflation: Without QE, the Eurozone economy could have faced deflation, prolonging the recession. The monetary policy provided by QE aimed to counteract potential drops in prices, thus preventing stagnation.
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Additional Policy Tool: QE served as an essential monetary policy tool, especially after traditional methods (like adjusting interest rates) had already been employed without the desired effects.
Step 2
Arguments that QE has not been effective
Answer
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Financial Institutions' Confidence: Many financial institutions were hesitant to utilize QE effectively due to a lack of confidence in the economy. This resulted in reduced lending despite the availability of funds, as firms and consumers remained apprehensive about taking on debt.
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Consumer Behavior: The uncertainty in the market led consumers and businesses to increase their savings rather than spend, leading to a lower demand for loans, undermining the objectives of QE.
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Fiscal Policy Restrictions: The effectiveness of QE was further limited by contractionary fiscal policies in many European countries, which countered the intended stimulative effects of QE.
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Inflation Concerns: If the economy were to recover too quickly due to excessive QE, it could lead to inflationary pressures, potentially making the economy volatile.
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Diverse Economic Responses: The divergent economic conditions across different European countries meant that QE might have been too aggressive for some economies and insufficient for others.