QE is designed to lower short-term interest rates exclusively and has little effect on long-term asset prices; therefore, if used excessively, it mainly erodes bank profitability rather than causing asset price distortions.

QE is an unconventional monetary policy where the central bank purchases long-term assets (such as government bonds) with newly created money, which helps lower long-term interest rates; however, if used excessively, this expansion of the monetary base may increase the risk of runaway inflation.

QE involves the central bank buying financial assets to inject liquidity into the economy, thereby reducing yields and stimulating borrowing and investment; yet, overreliance on QE can distort asset prices, leading to bubbles and misallocation of capital in financial markets.

QE is equivalent to printing money to directly finance government spending, which means that if overused it turns monetary policy into a de facto fiscal policy tool, potentially compromising central bank independence.

QE is a contractionary monetary policy that works by selling long-term assets to absorb liquidity, so if used excessively it could lead to deflationary pressures.

QE is primarily a tool to reduce short-term interest rates by lowering the policy rate, and its overuse can erode bank profitability by compressing interest margins.

QE operates by contracting the central bank’s balance sheet and reducing the money supply, so excessive use would have a deflationary effect that dampens economic activity.

Assets: Loans provided to customers, securities held in the investment portfolio, and reserves held at the central bank.

Liabilities: Customer deposits, bank-issued bonds, and borrowings from other banks.

Assets: Customer deposits and interbank borrowings, because they represent funds available to the bank.

Liabilities: Reserves held at the central bank and loans provided to customers, as these are funds that must be returned.

Assets: Bank-issued bonds and equity capital, because they provide the bank with a source of funds.

Base money includes physical currency in circulation (banknotes and coins) plus the reserves that commercial banks hold at the central bank.

The central bank can influence the amount of base money by open market operations, such as buying or selling government bonds, which injects or withdraws reserves from the banking system.

Since base money is a liability of the central bank, it does not appear at all on commercial banks’ balance sheets.

Base money appears on the asset side of the central bank’s balance sheet, reflecting the bank’s ownership of currency and reserves.

Base money is a liability of commercial banks, representing currency they owe to depositors.

A decrease in the policy interest rate has no impact on aggregate demand, because lower borrowing costs do not influence investment or net exports.

Depreciation of the currency reduces net exports because domestic goods become more expensive for foreign buyers.

Lowering the policy interest rate reduces the return on domestic financial assets, decreasing demand for the domestic currency and causing it to depreciate.

When the policy interest rate is lowered, the domestic currency appreciates, since investors anticipate a stronger domestic economy.

A cut in the domestic policy rate, while foreign rates remain unchanged, can lead to capital outflows that weaken the currency.

Raising the policy interest rate increases the return on domestic assets, attracting foreign capital, raising demand for the domestic currency, and causing appreciation.

Exchange rates are determined solely by trade flows and are unaffected by changes in interest rates.

Capital adequacy standards are imposed primarily to ensure banks remain highly profitable by forcing them to invest in only the most secure, high-return projects.

Capital adequacy requirements mandate that banks hold a minimum percentage of equity (or net worth) relative to their risk-weighted assets, ensuring they can absorb unexpected losses and protect depositors.

Capital adequacy requirements limit banks’ total asset growth by capping how much they can lend, thereby directly preventing excessive expansion of credit.

Capital adequacy rules focus on ensuring banks hold enough liquid assets to meet short-term obligations, rather than primarily serving as a safeguard against long-term losses.

These requirements help build confidence among depositors and investors by ensuring that banks maintain sufficient capital to cover potential losses, thus reducing the likelihood of bank runs.

If the real exchange rate rises, domestic goods become more expensive overseas, which lowers aggregate demand and depresses domestic output.

An increase in the real exchange rate means foreign goods become more expensive relative to domestic goods, indicating a real depreciation for the home economy.

If the real exchange rate rises, domestic producers face weaker international competitiveness, so net exports fall and domestic output declines.

When the real exchange rate increases, it signals that foreign goods are cheaper, so domestic consumers substitute away from locally produced goods toward imports.

A higher real exchange rate automatically reduces the nominal exchange rate, thereby stabilizing domestic prices without affecting output.

Real exchange rate movements do not significantly affect employment, since any rise in exports is offset by an equivalent fall in domestic consumption.

When the home currency depreciates in real terms, exports become more competitive abroad and imports become more costly, raising aggregate demand and boosting domestic output.