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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 increase in lending can stimulate investment in the economy and enhance economic growth.
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Consumer Lending: By providing funding to institutions, QE permits increased lending to consumers. As consumers are able to access credit, their consumption rises, contributing to economic activity.
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Preventing Deflation: Without QE, the Eurozone economy may have faced deflation, severely prolonging the recession. The additional liquidity likely mitigated potential price declines, thus preventing further economic damage.
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Monetary Policy Tool: QE served as a necessary monetary policy tool for the central bank, particularly after previous rate cuts had not significantly spurred economic growth.
Step 2
Arguments that QE has not been effective
Answer
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Confidence Issues: Many financial institutions did not utilize QE effectively because a lack of consumer and business confidence meant there was insufficient demand for loans, undermining the intended effects of QE.
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Savings Over Spending: Consumers and firms displayed a tendency to increase savings rather than engage in borrowing, primarily due to concerns about the stability of the Eurozone economy. This behavior negated the intended stimulatory effect of QE.
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Limiting Fiscal Policy: The effectiveness of QE was often restricted by contractionary fiscal policy in various European countries. Such policies created an environment that limited the overall impact of monetary strategies like QE.
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Capacity Constraints: There were significant spare capacities in European economies, leading to a situation where QE was ineffective in stimulating demand, especially if the economic downturn was severe.