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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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Financial Support for Institutions: QE provided financial institutions with additional funding which enabled them to lend more to businesses. This boost in lending increased investment in the economy, fostering economic growth.
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Increased Consumer Lending: By facilitating increased lending to consumers, QE helped stimulate consumption, further contributing to economic growth during a recession.
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Prevention of Deflation: Without QE, the Eurozone could have faced deflation, significantly prolonging the recession. The additional liquidity from QE helped mitigate the risk of falling prices, promoting stability.
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Monetary Policy Tool: QE was necessary after interest rates were already low and the economy did not respond adequately. The program served as an essential monetary policy tool for the ECB in stimulating economic activity.
Step 2
Arguments that QE has not been effective
Answer
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Lack of Demand for Loans: Many financial institutions utilized QE but did not increase lending due to a lack of consumer and business confidence. This lack of demand for loans undermined the intended effects of QE.
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Increased Savings Rather Than Spending: Instead of using the additional funds, consumers and firms exhibited increasing savings, leading to reduced demand in the economy and limiting the stimulative capacity of QE.
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Limited Effect by Fiscal Policy: The impact of QE was also restricted by contractionary fiscal policies in several European countries, which offset the intended stimulative effects.
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Inflation Concerns: There are fears that if the recession persisted without addressing the root causes, excessive QE could lead to inflation, thereby destabilizing the economic recovery.
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Diverse Economic Conditions: Different economic situations across European countries meant that while some could benefit from QE, others experienced insufficient results, resulting in a 'one size fits all' approach that was not universally effective.