The Eurozone economy Figure 1: Exchange rate of the euro (€) to the British pound (£) Figure 2: Eurozone inflation rate as measured by the Consumer Prices Index (CPI) Extract A European Central Bank disappoints markets with weaker than expected stimulus Mario Draghi, president of the European Central Bank (ECB), surprised financial markets in November 2015 with a less ambitious package of monetary stimulus than many had anticipated - Edexcel - A-Level Economics A - Question 6 - 2017 - Paper 2

1. Decrease in Aggregate Demand: The low inflation rates observed can be attributed to a decline in consumer and business confidence, leading to reduced spending and investment, thus decreasing overall demand in the Eurozone.

2. Eurozone Monetary Policy: The ECB's measures, such as lowering interest rates and introducing quantitative easing, aimed at stimulating the economy may not have effectively raised inflation due to the pre-existing economic conditions and a stagnant recovery.

An appreciation of the euro can have several impacts on the current account:

1. Exports Become More Expensive:
   As the euro appreciates, goods and services priced in euros become more expensive for foreign buyers, likely leading to a decrease in exports. This could negatively affect the current account balance as export revenues fall.

2. Imports Become Cheaper:
   Conversely, a stronger euro makes imports cheaper, encouraging higher import volumes. This might increase the current account deficit since more money would flow out of the Eurozone for foreign goods and services.

The success of the ECB's quantitative easing (QE) program hinges on various factors:

1. Effectiveness of QE:
   QE aims to lower interest rates and increase money supply, theoretically promoting lending and investment. If the financial markets respond positively, it can lead to increased consumer spending, pushing inflation closer to the target of 2%.

2. External Factors:
   However, external factors such as global economic conditions, low commodity prices, and compliance from member states in implementing fiscal measures can undermine the effectiveness of QE. For instance, if economic sentiment remains weak, even substantial liquidity may not spur significant inflation.

3. Adaptive Measures:
   Continuous assessment and adaptation of the QE measures, as indicated by the ECB's plans to extend and adjust the program, suggest a proactive approach. Nevertheless, if accompanied by a lack of structural reforms within member states, its overall impact could be limited.

1. Looser Fiscal Policy:
   Governments may increase public spending or reduce taxes to inject more money into the economy. This could stimulate demand, leading to higher economic growth particularly when interest rates are low and public investment can target infrastructure.

2. Supply-Side Reforms:
   These reforms could include improving labor market flexibility, reducing regulatory burdens for businesses, and investing in education and training. By enhancing the productivity and efficiency of the workforce, supply-side reforms can foster economic growth and potentially increase incomes over time, thereby contributing to a healthy economy.

3. Balancing Act:
   It is crucial for governments to balance fiscal stimuli with long-term sustainability to avoid potential debt crises that could arise from persistent budget deficits.