The US Federal Reserve (the country's central bank) has pursued a policy of quantitative easing (QE) for several years. Explain how quantitative easing affects the level of economic activity in a country.

Mark scheme

Marking points from the official mark scheme (May/June 2019). The mark or mark type is shown in brackets.

1. [12] (a) The injection of money into the economy to boost spending. The central bank creates new money electronically to buy financial assets like government bonds. This cash injection lowers the rate of interest and boosts asset prices, which increases wealth and supports spending, increasing AD and stimulating employment and growth.
2. [13] (b) Identification of the relevance of increases in wages on the transaction and precautionary for money (liquidity preference (LP)) and the effect on interest rates. The effect of a fall in confidence on the demand for money.