Cambridge International as and a level Economics Ebook

Quantitative easing
When the rate of interest is very low, a central bank may 
decide to try to increase aggregate demand by engaging in 
quantitative easing
. Th
is involves a central bank buying 
government bonds from fi nancial institutions, including 
commercial banks, in order to increase the money supply. 
With more liquid assets, it is hoped that the commercial 
banks will lend more which will increase investment and 
consumer expenditure and so aggregate demand and 
economic activity.
Quantitative easing was used in Japan in the 1990s and 
in the UK and USA following the global recession at the 
end of the fi rst decade of the twenty-fi rst century.
Total currency flow
Th
e 
total currency fl ow
on the balance of payments 
refers to the total outfl ow or infl ow of money resulting 
from international transactions as recorded in the 
current account, capital account and fi nancial accounts. 
If a central bank maintains an exchange rate below the 
equilibrium level, there will be an infl ow. Th
is is because 
the central bank will sell the domestic currency, which 
will be bought by foreigners to pay for exports from 
the country. Exporters will deposit the money into the 
country’s banks, which will lead to a multiple increase in 
the money supply.
Total currency flow: 
the current plus capital plus financial 
balances of the balance of payments.
KEY TERM
The monetary transmission mechanism
Th
is is the process by which a change in monetary policy 
works through the economy via a change in aggregate 
demand to the price level and the real GDP. Th
ere are a 
number of links in this process. For example, an increase 
in the money supply may lower the interest rate which in 
turn may increase aggregate demand. Higher aggregate 
demand may increase output and/or the price level.