Question

Identify at least three effects that could result when the central bank changes its balance sheet that can impact the economy.

Answer 1

Answer:-

The three effects that could result when the central bank changes its balance sheet that can impact the economy are

1) Open market operations - By performing the open market operations eg by buying the Treasury bill (T-Bill) securities the central bank assets grow by T-bills and the money is pumped into the economy that improves the economy to come out of recession.

2) Quantitative easing (QE):- This was one of the major tool used in the 2008 financial crisis when there was gradual reduction of borrowing rates in order to boost the economy. This changes the composition of balance sheet of the central bank. This QE will stimulate the economy and helps to improve the health of the economy.

3) Increase the interest rates:- When the spending increases during economic expansion, which increases the inflation. The central bank increases the interest rates to control the inflation that cause changes in it's balance sheet. This monetary tightening will decrease the spending and helps in controlling the inflation impacting the economy.