AQA A Level Economics Paper 2 (7136/2) -22th May 2023 [Exam Chat]

Increases banks willingness to lend due to increased liquidity - usually used when interest rates are very low but banks are unwilling to lend due to increased risk and still don't stimulate spending (liquidity trap) so QE is used to encourage banks to lend - boosting investment, spending etc. - also reduces long term interest rates

Does anyone understand how quantitative easing is used as monetary policy to boost aggregate demand?

fairly high i'd say
but it'd come in the form of monetary policy
if you don't know it by now i'd recommend picking the other questions if it comes up

Do you think anything on financial markets will come up

It's used when interest rates are low and commercial banks still aren't willing to loan out due to low availability of credit as well as lacking confidence for both banks and consumers/firms. The government essentially prints money electronically and buys up gilts and bonds on the open market (open market operations). They can also lower the reserve rate requirement ratio but don't worry too much abt that. By buying up a bunch of bonds they've effectively injected money into the circular flow which obviously boost demand. Additionally by purchasing all these bonds they lower the yield of the bonds. To explain in short, if the price of a bond increases, the yield (return) an investor will get will be lower relative to the higher price. This means interest rates further into the financial market (not just base rate) will fall.

Getting into more technical eval, the government has bought up bonds that they don't want consumers/firms to be purchasing, and as such essentially crowd out that market. This forces economic agents to borrow from riskier sources such as in stocks+shares as well as non government based borrowing. Additionally by buying up all these bonds and replacing it with money, banks have more liquidity to work with so are more willing to lend this cheap money out. Hopefully you can connect the dots from here to how all of this leads to an AD shift outwards.

Anyone know the difference between supply side policies and supply side improvements?

Does anyone know what topics came in 2022 economics paper 2?

It's used when interest rates are low and commercial banks still aren't willing to loan out due to low availability of credit as well as lacking confidence for both banks and consumers/firms. The government essentially prints money electronically and buys up gilts and bonds on the open market (open market operations). They can also lower the reserve rate requirement ratio but don't worry too much abt that. By buying up a bunch of bonds they've effectively injected money into the circular flow which obviously boost demand. Additionally by purchasing all these bonds they lower the yield of the bonds. To explain in short, if the price of a bond increases, the yield (return) an investor will get will be lower relative to the higher price. This means interest rates further into the financial market (not just base rate) will fall.

Getting into more technical eval, the government has bought up bonds that they don't want consumers/firms to be purchasing, and as such essentially crowd out that market. This forces economic agents to borrow from riskier sources such as in stocks+shares as well as non government based borrowing. Additionally by buying up all these bonds and replacing it with money, banks have more liquidity to work with so are more willing to lend this cheap money out. Hopefully you can connect the dots from here to how all of this leads to an AD shift outwards.

Thanks for the reply and explaining it to me, I don't know if I am right but is it not the central bank(Bank of England) that prints the money? also why is it that when we reduce interest rates through quantitative easing, banks are now willing to lend. I thought the whole problem at start was that they don't lend at incredibly low interest rates

You can also mention how, by purchasing assets and increasing their price, economic agents feel 'better off' and are therefore inclined to spend.
If the yield on bonds is lowered, what interest rates in particular would decrease? Those offered by usual, commercial banks?

Yeah commercial banks. More specifically short term interest rates, but I think we might be too far off spec atp lol. As far as I know, short term interest rates are much more variable, as commercial banks are more willing to change them in the short run because they have confidence that the bank of england will keep their base rate fixed in the short run as well. Long term interest rates like non variable mortgages and any long term borrowing that isn't subject to change over time is much harder to change, and usually won't be changed by just quantitative easing.

however this doesn't necessarily pass on lower interest rates to consumers further down the food chain, because the financial institutions that the government lends to may not be confident enough to lower their interest rates at their own volition.

Yes, you're completely right that was my mistake, the Bank of England is separate to the government and BoE is the one that prints money. Your second thing is because the bank of england can change the base rate which is the rate that they lend to financial institutions etc., however this doesn't necessarily pass on lower interest rates to consumers further down the food chain, because the financial institutions that the government lends to may not be confident enough to lower their interest rates at their own volition.
Quantitative easing directly manipulates bond prices, so interest rates are forced to fall, and these commercial banks now have more money available to them, so they're more willing to lend (in theory)

also are there any other topics the Phillip's curve can be linked to other than conflict of objectives?

So is the natural rate of unemployment curve just to show that even if inflation increases, unemployment might just stay constant?
So would it be used more as an evaluation point. (Sorry the philips curve topic is something I never understand)

It's more to show that policies that are aimed to increase AD will not necessarily cause a fall in the natural rate of unemployment, and inflation is the main reason for this. But remember, this is only focusing on the natural rate of unemployment, not all types of unemployment. High inflation (depending on the cause) can definitely cause an increase in cyclical unemployment.