Revision presentation on QE

1. Advantages and disadvantages of
quantitative easing (2019 update)
A Level
Macroeconomics
Tutor2u
Economics

2. The current background in 2019
• The Bank of England’s MPC’s quantitative
easing (QE) programme, where the Bank
creates new money to buy financial assets
totals £445 billion of assets in April 2019
• £435 billion of which are government
bonds and £10 billion of commercial debt.

3. What is
quantitative
easing?
QE involves the introduction of new money into the national supply by a
central bank.
In the UK the Bank of England creates new money (electronically) to buy
assets (mainly bonds) from insurance companies, pension funds and
commercial banks
Increased demand for government bonds causes an increase in the market
price of bonds and therefore causes their price to rise
A higher bond price causes a fall in the yield on a bond (this is because there
is an inverse relationship between bond prices and yields)
Those who have sold their bonds may use the extra funds/cash to buy assets
with higher yields such as shares of listed businesses and corporate bonds
Commercial banks receive cash and this increases their liquidity. This may
encourage them to lend out more money

4. How QE affects the macroeconomy
Wealth effect - lower yields (interest rates) lead to higher share and
bond prices
Borrowing cost effect - QE lowers the interest rate on long term
debt such as government bonds and mortgages
Lending effect - QE increases the liquidity of banks and increased
lending from banks lifts incomes and spending in the economy
Currency effect - lower interest rates has the side effect of causing
the exchange rate to weaken (a depreciation) which helps exports

5. Advantages of
quantitative
easing (QE)
Gives a central bank an extra tool of monetary policy
besides changing interest rates
Increasing the size of the monetary base helps to lower
the threat of price deflation. Without QE, the fall in real
GDP would have been deeper and the rise in
unemployment greater
Lower long term interest rates have kept business
confidence higher and given the commercial banking
system extra deposits to use for lending
QE can lead to a depreciation of the exchange rate will
helps to improve the price competitiveness of export
industries

6. Disadvantages
of
quantitative
easing (QE)
May contribute to rising wealth inequality because of
surging house prices and housing rents – worsens
geographical mobility
Increase in the monetary base might lead to
inflationary pressure
Ultra-low interest rates can distort the allocation of
capital and also keep alive zombie companies (note:
this is a key criticism of Hayekian/Austrian school)
Low interest rates has reduced the annual incomes
from pension funds making life tougher for those with
savings and who rely on their occupational pension

7. Key
evaluation
points
Uncertain time lags and impact of QE on the real
economy
Bank of England now a major holder of UK
government debt
Some economists arguing for “Green QE” or
“people’s QE” i.e. using QE to help fund green
infrastructure, education and health/social care
QE has helped to keep interest rates low – but is
the economy now too dependent on cheap money?

8. Advantages and disadvantages of
quantitative easing (2019 update)
A Level
Macroeconomics
Tutor2u
Economics