Quantitative easing economics help

Watch this thread
safahJ
Badges: 13
Rep:
? You'll earn badges for being active around the site. Rep gems come when your posts are rated by other community members.
#1
Report Thread starter 3 months ago
#1
Hi guys i wanted some help with these questions.

To what extent is a recession desirable? (20 marks)

How effective is quantitative easing during a recession (20 marks)
0
reply
Pegasus25
Badges: 12
Rep:
? You'll earn badges for being active around the site. Rep gems come when your posts are rated by other community members.
#2
Report 3 months ago
#2
(Original post by safahJ)
Hi guys i wanted some help with these questions.

To what extent is a recession desirable? (20 marks)

How effective is quantitative easing during a recession (20 marks)
I can only give a semi-detailed reply but here is a summary. Start with definitions of key words in the question at the beginning of the essay.
1)Recession: pros= Clears out under-performing companies from the economy, that may be living off government subsidies or just not doing anything productive with our limited resources. This improves the efficiency of the economy. Can be desirable for investors as stock prices hit low prices, which should go up long term. Resets the economy and leads to a reallocation of resources = good as people sober up and invest in productive industries (e.g. not elusive internet companies like in the dot com bubble). Also, you could argue that savings of the population can rise as people have to budget more as they have lower incomes. This can be good for future shocks to the economy.
cons= speaks for itself. Unemployment rises and general mood of society tanks. Productive potential of the economy shrinks/ economy is not performing at its best. Government often decides to spend loads of taxpayers money on bailing out companies that were inefficient in the first place. The list goes on.
Overall, depends on the government's response. If the government decides to spend lots of money on bailing out, then they have less money to support the unemployed or improve people's living standards. Government can also cut interest rates (or the central bank can) which will end any necessary savings that people are developing. This leads to cheap credit and artificial growth in many sectors.
2) Quantitative easing: pros= more money for banks as the government has just handed it to them for their assets. This new money then helps consumers as they can access cheap credit quickly, in theory. This leads to greater consumption (increasing AD) and then leads to increased employment and a stronger economy etc. QE is also effective when the economy is in a liquidity trap and monetary policy experts have nothing else to spur the economy into action.
cons= Economy lives on borrowed time. This is colloquial but what I mean by this is that QE leads to too much money in the system. "Too much money chasing too few goods" as they like to say. QE has historically led to inflation and we are currently seeing that now in the US and the UK, for example. The economy kind of gets used to this consistent printing of money to sustain cheap credit and consumer spending. Greater inflation unfortunately leads to many bad things (less savings, greater confusion, uncompetitive exports). All of this can lead to the economy entering another recession later on which means QE is a short-term solution.
QE is a short term solution. It is designed to keep interest rates low (cheap credit) but leads to higher interest rates later on when there is inflation. Therefore it is effective in the short-term for a recession but not helpful in the long term.
That is just my opinion though so do your own research and don't listen to the waffle that I have written here as gospel.
I hope this helps in some way.
0
reply
X

Quick Reply

Attached files
Write a reply...
Reply
new posts
Back
to top
Latest
My Feed

See more of what you like on
The Student Room

You can personalise what you see on TSR. Tell us a little about yourself to get started.

Personalise

Y13's - If you haven't confirmed your firm and insurance choices yet, why is that?

I am waiting until the deadline in case anything in my life changes (25)
18.94%
I am waiting until the deadline in case something else changes (e.g. exams/pandemic related concerns) (15)
11.36%
I am waiting until I can see the unis in person (10)
7.58%
I still have more questions before I make my decision (22)
16.67%
No reason, just haven't entered it yet (34)
25.76%
Something else (let us know in the thread!) (26)
19.7%

Watched Threads

View All