Which of the following is not a mechanism through which Quantitative Easing (QE) could affect the wider economy
A) An announcement effect whereby the mere announcement of a QE programme influences expectations and causes individuals to alter their spending and saving decisions.
B) A direct spending effect whereby cash given to individuals increases their spending
C) An excess M0 effect whereby banks are more willing to lend when their cash balances are large
D) An asset price effect whereby assets purchased through the QE programme tend to rise in price and so influence borrowing and lending decisions in the economy
E) An inflation expectations effect whereby QE raises expectations of future inflation.

Question

Quizplus · Accepted Answer

QE involves the central bank buying financial assets (usually government bonds) from financial institutions, which increases the reserves of those institutions. This makes them more willing to lend, and borrowing becomes cheaper. Thus, the direct spending effect mentioned in option B is a direct consequence of QE rather than a mechanism by which QE affects the wider economy. The other options are all mechanisms through which QE could affect the wider economy.

Which of the Following Is Not a Mechanism Through Which