Page 117 - F1 - AB Integrated Workbook STUDENT 2018-19

External analysis – economic factors

9.4 Quantitative easing

Quantitative easing is a relatively unconventional monetary policy that
involves a country’s central bank buying financial assets (such as
government and corporate bonds) using money that it was generated
electronically.

Put more simply…..the central bank has essentially printed itself new money that it
can spend (although in practice it is unusual for the money to actually be printed).

This has the effect of increasing the amount of cash in the economy, hopefully
increasing aggregate demand. However, it can cause increased inflation and
weaken a country’s exchange rate – which both come with their own problems.

9.5 Economics theories

Several economists have proposed different theories about the best ways for
governments to look after the economies of their countries. Different governments
may follow different theories.

Classical theory

 Suggests government does nothing. Believed that the economy would
naturally move to an equilibrium point
with full employment, all by itself.

Keynesian view (demand side)

 Argued that governments need to Keynes argued that government
manipulate the level of aggregate intervention was often needed in order
demand within the economy to move the economy closer to its ideal
equilibrium point (one where there was
full employment).

 Practically, this means governments Governments should increase taxes
should borrow money and inject it into and run a budget surplus to slow the
the economy (run a budget deficit) economy down if it was growing too
when economic growth needs fast and experiencing significant
stimulating. inflation.

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