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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
Quantitative easing (QE) can be evaluated on the basis of its effectiveness in addressing economic downturns. Firstly, QE provided financial institutions with additional funding to increase lending to businesses. This accessibility to credit enabled businesses to invest more, contributing to economic growth.
Secondly, by facilitating increased lending to consumers, QE enhanced consumer spending, thereby stimulating demand within the economy. This boost in consumption is crucial during a recession, where aggregate demand typically declines.
Moreover, without QE, there was a strong risk that the Eurozone economy could have entered deflation. The increased liquidity from QE mitigated this risk, preventing a further decline in prices, which could have worsened the recession.
Finally, QE served as an essential tool for the European Central Bank (ECB), especially when traditional monetary policy approaches, such as lowering interest rates, had already been exhausted.
Step 2
Arguments that QE has not been effective
Answer
On the contrary, the effectiveness of QE can also be challenged. Many financial institutions may not have fully utilized the additional funds for lending to businesses and consumers. This hesitancy could stem from a lack of confidence among businesses regarding demand for loans in a recessionary environment.
Additionally, there were issues with consumer behavior; many consumers increased their savings instead of spending, indicating that the lack of demand for loans persisted despite the availability of funds. This behavioral shift limited the effectiveness of QE.
Furthermore, a significant factor affecting the impact of QE was the contractionary fiscal policies in many Eurozone countries, which undermined potential economic recovery. In many cases, fiscal measures either did not materialize or did not sufficiently support the monetary policy measures enacted by the ECB.
Lastly, the diverse economic conditions in different European countries meant that while QE aimed to address a collective issue, it may not have sufficed for all individual economies.