By Idris Fabio Augustus Crockett-Magee & Sam Brill.

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Presentation transcript:

By Idris Fabio Augustus Crockett-Magee & Sam Brill

Quantitative Easing (QE) is a policy used by the Bank of England introduced in March This is a Monetary policy used when the interest rate can not go any lower (0.5%).

This is done by The Bank of England crediting its own account with more money. The money buys government bonds from various firms, injecting money directly into the economy. These firms may use the profits to invest in other companies or lend. This may lead to lower interest rates being charged and therefore more money is spent in the economy. When the economy has recovered BoE sells the bonds and destroys the cash it receives. In theory no extra cash is created in the long term.

Quantitative Easing stimulates Aggregate demand through increased spending as a result of more money circulating in the economy. QE also lowers long term borrowing costs, and helps the economy reach the governments inflation target of 2.0%.

AdvantagesDisadvantages Increased Economic Growth / Higher living standards Inflationary pressures may be too large Preserves industries / businesses in recession Lower return on savings due to lower interest rates Greater/ maintained level of employmentCurrency Manipulation – Reduced value of £, exports cheaper, other markets which export are less competitive Increased consumer confidenceMay not be possible to sell bonds back, damaging UK borrowing ability Boost inflation to target of 2%

Since 2009, QE has been used to purchase about £375 billion of government bonds. From then until March 2013, economic growth increased by 3.7%, and therefore some say that QE has worked. While growth has increased, there has also been an increase in CPI of 14.4% in this period. Others argue that the negative effects of inflation, which has increased 4 times as much as growth, shows that QE is not working to improve the economy. While the growth increase is positive, it can’t be proven whether QE has helped to achieve this or has made it worse. It is possible that the slight increase in growth is a result of factors other than QE.