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Quantitative Easing Case Study

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Question 1. (a) Explain what you understand by each of the following terms. In each case give an example relating to the financial markets to illustrate your answer.

• asymmetric information
• moral hazard
• quantitative easing (QE)

 Asymmetric information In the financial market, asymmetric information is a situation in which economic agents involved in a transaction have different information. It happens in the transaction when the buyer has more information than the seller, or contrary, as when a private motorcycle seller has more detailed …show more content…

If interest rates are very low and the Bank’s Monetary Policy Committee expects inflation to fall below the Government’s 2% target, quantitative easing can inject money directly into the economy to boost spending (Wieland, 2009).
The way quantitative easing works:
- Through the commercial banking system, central bank use money to buy bond with low risk, low interest rate and low loan
- Central bank buy directly bonds from business, financial markets (pension fund, insurance companies, etc…). Companies for example with a willing central bank seeking to buy its bond, will be able to pay a lower interest rate when new bonds are issued or existing bonds come to the end of their life and need to be …show more content…

With the information from part (a), there are many reasons why there is a need to regulate financial markets.
Regulation is the best way to protect participants of financial market. Asymmetric information and moral hazard always occur in the market, effect on the action of participants. One party will have more advantage information than other in the transactions. The existence of asymmetric information also suggest that consumers may not have enough information to protect themselves fully. Moreover, in an unregulated market, investors will not have enough information to guide their investments, which should not be based on rumor and hearsay. Companies have incentives not to share information, such as bad news about themselves or information about others that is not already known in the marketplace. Therefore, financial market need to be regulated to control and avoid problems. For example in UK, consumer protection regulation has taken several forms. Firth is truth in lending, which requires all lenders, not just bank, to provide information to consumer about the cost of borrowing including a standardize interest rate and the total finance charges of loan. Legislation also requires creditors, especially credit card issuers, to provide information on the method of assessing finance charges and requires that billing

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