Question

Provide in each case a brief explanation articulating why the statement may be true, false or even uncertain.

Quantitative Easing is likely to be riskier as an antidote for the current crisis for emerging economies such as the Philippines, Indonesia, South Africa, Chile, Brazil, and Turkey than for developed economies such as the U.S., UK, Eurozone, Canada, Australia or New Zealand. (Word limit 300)

Answer 1

Given statement is correct because in a developed economy, there has been a wide surplus of foreign currency and wide surplus of of fiscal stimulus so that government can use it to counter major adverse scenario in the economy . The central bank in these economies are loaded onto surplus as well as they can also opt for expansion of their balance sheet as their economy are relatively stronger and they will quickly revive than that of developing economy.

In a developing economy, fiscal stimulus will lead to widening of the gap between the trade deficit so,In these emerging countries, Central banks should be using a balanced approach towards providing any kinds of fiscal stimulus and quantitative easing in order to stimulate the demand into the economy because that can create additional burden on the books of accounts as well as that will devalue the domestic currency and destabilize the economy to a great extent in the long run.

When there is a quantitative easing in the the developing economy, the domestic currency of these developing economy lose against Dollars and it also lead to shrinking of the foreign currency reserve so to protect these kind of adverse scenarios in the economy the central government need to be highly proactive in management of these adverse scenarios rather than reacting later by providing such fiscal injection of stimulus to revive the economy because in the long run, the economy will sink further.

So developed economies are relatively in better position to have such a central bank, that can ease the monetary policy for stimulation of demand into the economy to protect against a slowdown and recession.