mind map

quantitative easing

Quantitative easing means putting more money into our economy to boost spending.
the targets of ‘quantitative easing’ ：

- keep the inflation stable and promote a healthy economy.

The bank of England use the interest rate to control inflation , and they aim is keep the interest at 2% but the target made by government . why the government and bank hope to keep the inflation stable ,this is because if the inflation below 2% or nearly zero, it reduce the the bank rate to boost spending and inflation. Also there is a still significant risk of very low interest rate, the bank can increase the quantity of money,so in other words, inject the money directly to the economy, the process of this also called quantitative easing. Because of injection of money the spending may increase because with the increase in lending the money to the seller or buyer they can spend more which is more than before, therefore the spending will increase and the inflation rate may grow up. Whereas why keep stable inflation is good? Because if the inflation is unstable, in terms of householder and companies which is very costly. and they make it hardly to see how price of individual good are changing compared with others.

-supply more money

why should more supplied?

Because the money supply needs to keep growing at the steady rate of the economy,and to ensure inflation remain close to the government 2% targets.

A country has a large current account deficit, what policy should be followed?

1. I think the government should do nothing, because it may be that under a free exchange rate system therefore the currency may face to depreciate. Also if a country has a strong economy it will attract FDI(foreign direct investment0) r loans into the capital account so the current account is balanced.
2. expenditure switching policies. Because these sort of policies reduce domestic spending on imports also the government can set the tariff or non tariff barriers to protect the domestic business. Also the government can subsidies to domestic producers, If the government recognise how important of exchange rate is helpful, they will set lower exchange rate or lower interest rate to encourage the domestic demand and the number of exports.
3. Expenditure reducing policies, this is means reduce spending on imports by reducing total spending such as deflationary fiscal policies, also they can set higher tax and spend lower money also deflationary if monetary. on anther hand the government can increase the interest rate which is reduce the demands, because less demand leading less expenditure.