ECONOMICS
MONETARY POLICY
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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Existing government and corporate bonds
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New government and corporate bonds
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Existing government bonds and new corporate bonds
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None of the above
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Detailed explanation-1: -The money we used to buy bonds when we were doing QE did not come from government taxation or borrowing. Instead, like other central banks, we can create money digitally in the form of ‘central bank reserves’. We use these reserves to buy bonds.
Detailed explanation-2: -The pension funds would sell the bonds to the Bank of England and in exchange, they would receive deposits (money) in an account at one of the major banks, say RBS. RBS would end up with the new deposit (a liability from it to the pension fund), and a new asset – central bank reserves at the Bank of England.
Detailed explanation-3: -Understanding Quantitative Easing (QE) To execute quantitative easing, central banks buy government bonds and other securities, injecting bank reserves into the economy. Increasing the supply of money lowers interest rates further and provides liquidity to the banking system, allowing banks to lend with easier terms.
Detailed explanation-4: -When did quantitative easing start? The first QE programme in the UK was launched in 2009 when the financial crisis was threatening the economy, unemployment was rising and the stock markets were in freefall.