Section A
(a)
Quantitative easing - expansionary monetary policy - Central bank will
purchase government bonds/ financial assets from commercial banks - will
increase liquidity in banking system - enable banks to generate more
lending - supportive of consumption and investment
(b) Central bank has the responsibility to ensure that the inflation target
is met - takes calculated risks every time when they implement QE -
slight mistake could be very costly - for instance, if money supply is
increased excessively, that may lead to high and unstable inflation -
undermines the stability of banking system - people may end up
withdrawing money - banks may experience liquidity crisis - unable to
accommodate growth
In 2008, banks engaged in
sub-prime lending - lent excessively even to people with poor credit
history - many defaulted on the loans - banks experienced huge losses
being unable to recover most of the loans given out - many were afraid
that the banks in the USA and parts of Europe to go bankrupt - withdraw
their money - run on the bank - unstable banking system - could cause
the economy to collapse if the government did not intervene timely
(c)
Fall in the price of oil is due to competitive forces - excess supply
in the market - Saudi Arabia over-produced oil - Chinese economic
slowdown - fall in the demand for oil for industrial need - collapse in
prices
To some extent, the claim is true - oil
is a necessity - has low price elasticity of demand - fall in price of
oil implies lower export revenue - fall in (X-M) of oil exporting
countries - lower AD and hence output and growth
However,
the same cannot be said for China - borrowed heavily over the past to
fund infrastructure projects - cannot continue to borrow forever - need
to scale back spending and start paying back - avoid bankruptcy on banks
- fall in G - lower AD and hence output and growth
In
conclusion, economic downturn was not just due to fall in oil prices -
may be valid for oil producing nations in the OPEC but not for most
parts of the world
(d)
The article mentions that OECD is concerned that major economies were
over-relying on loose monetary policy as a hope for recovery - did not
work - historically low level of interest rates - did not stimulate
borrowing and spending - consumer and business confidence at all time
low - afraid to undertake more commitments - difficulty to pay back
However,
the OECD's concern may be unfounded - usually there would be a time lag
- flows of information are not perfect - for instance, some may not
realise about the rate cut - also firms may have invested in a
particular project - unlikely to invest so soon
The
extract also mentions that major economies should instead focus on
loose fiscal policy - boost government spending onto roads and
healthcare - injection into the circular flow of income - rise in AD and
hence output and growth - betterment of infrastructure could raise
potential capacity of economies - bigger roads reduce congestion -
better health will increase productivity at workplace - higher LRAS and
therefore potential growth
However, loose
fiscal may not work either - China for instance had borrowed heavily in
the past - there is a limit to how much more it could borrow further -
has to start paying back - same can be said regarding developed
economies - have the macroeconomic aim of balanced budget - pursue
austerity measures to ensure the goal is met at the expense of growth
In
conclusion, it is thought that the global economies will recover - pace
of recovery may be different - case to case basis - some countries may
experience growth at different level
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