What are interest rates?

Interest rates are the cost of borrowing or the reward for saving.

What is monetary policy?

Monetary policy is the use of interest rates by the central bank. This causes a shift in aggregate demand.

What is expansionary monetary policy?

Expansionary monetary policy is when the central bank reduces interest rates. This causes an increase in aggregate demand.

What is contractionary monetary policy?

Contractionary monetary policy is when the central bank increases interest rates. This causes a decrease in aggregate demand.

How do lower interest rates affect consumers?

Lower interest rates reduce the cost of borrowing and the reward for saving. This incentivises consumers to borrow and disincentivises them from saving. Additionally, lower interest rates tend to push house prices up, allowing homeowners to benefit from increased wealth and leading to higher consumer confidence. This results in increased consumer spending and aggregate demand.

How do lower interest rates affect businesses?

Lower interest rates reduce the cost of borrowing for businesses, incentivising them to borrow more. Businesses also anticipate an increase in consumer spending, which encourages them to increase investment in capital goods to meet the increased demand. This is known as the accelerator effect, leading to further increases in aggregate demand.

How do interest rates affect exchange rates and trade?

Lower interest rates lead to hot money flows out of the country as savers seek higher returns elsewhere, increasing the supply of the domestic currency and causing depreciation. This makes exports cheaper and imports more expensive, improving the trade balance. Higher interest rates attract hot money flows into the country, increasing demand for the currency and causing appreciation, making exports more expensive and imports cheaper.

Y12 Macroeconomics Notes

Quantitative Easing | A-Level Economics Notes

Jaisul Naik

13 Jul 2026 • 1 min read

These revision notes cover everything you need to know about Quantitative Easing for A-Level Economics. They're designed for students studying AQA A-Level Economics, Edexcel A-Level Economics, and Edexcel International A-Level Economics. Written by Jaisul Naik, UCL Economics graduate and A-Level Economics tutor since 2017.

What is quantitative easing?

Quantitative easing is when the central bank creates money electronically.

This money is used to buy assets such as bonds from high-street banks.

This increases their money supply, making them more willing and able to lend at a lower (high-street) interest rate.

This leads to consumers and firms borrowing more, which leads to an increase in aggregate demand and more economic growth.

The money gets deleted when the central bank sell the assets.

What are two advantages of quantitative easing?

The two main advantages of quantitative easing are that:

quantitative easing promotes economic growth through greater lending
quantitative easing works even when interest rates are close to 0%

What are two disadvantages of quantitative easing?

The two main disadvantages of quantitative easing are that:

quantitative easing may still fail if consumer and business confidence is low
quantitative easing is arguable nowhere near as power as fiscal policy

Summary questions

What is quantitative easing?
What are two advantages of quantitative easing?
What are two disadvantages of quantitative easing?

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