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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 during a recession.
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Consumer Spending: Financial institutions receiving additional funding from QE could also increase lending to consumers. This led to greater consumption, further driving economic growth.
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Avoiding Deflation: Without QE, the Eurozone economy may have faced deflation. By injecting liquidity, QE helped prevent prolonged economic downturns associated with falling prices.
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Tool for Monetary Policy: QE served as an additional tool for the European Central Bank (ECB) when traditional monetary policy (e.g., lowering interest rates) had already been exhausted. By maintaining lower interest rates, it aimed to boost economic confidence and activity.
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Fiscal Policy Limitation: Since many Eurozone countries adopted contractionary fiscal policies during the recession, QE helped provide a necessary counterbalance to support economies.
Step 2
Arguments that QE has not been effective
Answer
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Lack of Demand for Loans: Many financial institutions initially used QE funding to bolster their own balance sheets rather than increasing lending. A lack of consumer and business confidence led to a diminished demand for loans.
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Changing Savings Behavior: With consumers and firms increasingly focused on savings during the recession, there was reduced borrowing activity. Concerns regarding economic stability undermined confidence in taking loans.
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Limited Impact on Fiscal Policy: The impact of QE was limited by the contractionary fiscal policies adopted by various governments, reducing the overall effectiveness of monetary stimulus.
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Inflation Concerns: If the recession lasted longer than anticipated, the continuous application of QE could lead to inflation, making it counterproductive in the long run.
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Diverse Economic Recovery: Different countries within the Eurozone experienced varying degrees of recession. The 'one size fits all' approach of QE may have been too rigid, resulting in uneven recovery across member states.