The Bank of England’s Monetary Policy Committee (MPC) sets monetary policy to
meet the 2% inflation target, and in a way that helps to sustain growth and
employment. On 4th November 2020, the MPC voted to increase its quantitative
easing programme by another £150 billion.
A summary of the meeting can be found here:
https://www.bankofengland.co.uk/-/media/boe/files/monetary-policy-summary-and-minutes/2020/november-2020.pdf
1. Apply the IS/LM model to analyse the expected impact on the UK economy of the
increase in quantitative easing.
(50 MARKS)
2. If Germany, as a member of the Euro zone and the UK (which is not a Euro
member) both suffer from a recession, explain, using an open economy model,
whether they should adopt similar policies to increase the level of income.
(50 MARKS)
Assignment Specifics:
Content:
The following list is the range of topics explored in relation to the learning delivery with this assignment:
Introduction to the goods market (IS curve) and the money market (LM curve) which forms the IS-LM curve
Applying economic circumstances to the IS-LM curve, tax cuts, monetary policy, increases in government expenditure,
Exchange rates in the IS-LM model and how an open economy system affects the IS-LM model
Stabilisation policies; discussion of active or passive governmental policy strategy, as well as stabilisation policies including forecasting macroeconomic methods and leading economic indicators.
Government debt and budget deficits on the IS-LM model
Overall, not every single one of these should be brought in, this is just the order of content delivery we received with this assignment, an understanding of these topics should be displayed.
Sources:
The main textbook for the content is Mankiw (2019) the 10th Edition of his Macroeconomics textbook. Here is the Link to the whole textbook https://www.sea-stat.com/wp-content/uploads/2020/08/N.-Gregory-Mankiw-Macroeconomics-Macmillan-Higher-Education-2019-1.pdf
Particularly, chapters 11,12,13, 15, 16 and 17 cover most of the content
This is the main textbook and is a very good source of theory and specifics associated with the IS-LM curve, it has lots of good and clear graphs that would be good to use during essay
Other core textbooks but they are a bit more restrictive in terms of access; Macroeconomics, 2014, begg & Vernasca
essays in the theory of economic growth, by Joan Robinson
https://www.jstor.org/stable/42779200 Quantitative easing: a Keynesian critique, Palley, 2011
https://www.sciencedirect.com/science/article/pii/S1044028314000052 Quantitative easing in an open economy—Not a liquidity but a reserve trap , Herbst et al., 2014
https://mpra.ub.uni-muenchen.de/92394/1/MPRA_paper_92394.pdf An Improved IS-LM Model To Explain Quantitative Easing, Hiermeyer, 2019
https://academic.oup.com/oep/article-abstract/72/1/124/5498964 Quantitative easing in a monetary union, sareceno, 2019
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2690616 The Possible Tragedy of Quantitative Easing: An IS-LM Approach, Li, 2015
https://www.emerald.com/insight/content/doi/10.1108/S1569-376720170000018008/full/html?utm_source=TrendMD&utm_medium=cpc&utm_campaign=International_Finance_Review_TrendMD_1 Quantitative Easing in the Eurozone Orviska & Hudson, 2017
http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.1089.1638&rep=rep1&type=pdf Monetary Policy and Quantitative Easing in an Open Economy: Prices, Exchange Rates and Risk Premia, Peiris & Polemarchakis, 2012.
https://www.theguardian.com/business/2020/nov/05/bank-of-england-launches-new-150bn-stimulus-package Bank of England launches new £150bn stimulus package, Partington, 2020
https://www.ft.com/content/18ade542-d2a9-438a-ba5c-37b51475993b Bank of England launches £150bn stimulus to boost consumer spending, Giles , 2020
Question 1 guideline:
Thinking to start off with a brief overview of what the IS-LM model is and how it is applicable in contemporary macroeconomics, doesn’t need to be extensive, just so a first-time reader would understand what the IS-LM model is
Then a outline of what quantitative easing is and what part of the IS-LM model it affects
Then a discussion directly addressing the question, quantitative easing is essentially an injection into the economy causing interest rates to fall in the long run, thus more businesses take out loans due to it being cheaper, then that business spends more money, all across the economy this describes how quantitative easing is intended to stimulate the economy.
As the changes made by the bank of England were fairly recent, predictions based off theory will be okay.
Graphs from sources are encouraged and would be good to get in if relevant
Question 2 Guideline:
Brief description of the UK and German economies, similarities, differences? As well as defining what the eurozone is and how this affects the IS-LM model, open market
Potential to bring in the Mundell fleming framework where possible, where exchange rates are brought up.
Potentially the description of passive/active stabilisation policies intended to increase income in the long run
Statistics and cross-sectional data analysing Germany against the UK would be good to showcase an empirical understanding of the IS-LM curve.
Impact of Covid could be discussed briefly , considering COVID put both Germany and the UK into recessions, the whole world fell into recession to be honest.
