UK0,M<$b@mevgɦmJ8s =-bU#b5')byiDz)%2.&_NKpGtJ|QGdr:>Fj0rA ؞F&!| 4`,mz3[
Student videos

Exchange Rates: Impact of QE on the value of a currency

  • Levels: AS, A Level, IB
  • Exam boards: AQA, Edexcel, OCR, IB, Eduqas, WJEC

In this revision topic video we build an answer to a question examining the possible impact of an expansion of quantitative easing (QE) on the external value of a currency.

Exchange Rates: Impact of QE on the value of a currency


Examine the possible impact of an expansion of quantitative easing on the external value of a country’s currency.

Quantitative easing involves a central bank purchasing government bonds from commercial banks and other financial institutions. In return, the banks receive an injection of cash or liquidity onto theirbalance sheets. An increase in QE represents an expansionary monetary policy designed to increase GDP growth and perhaps prevent price deflation.

As a result of increased QE in the bond market we might see an increased demand for bonds which then increases their prices. Since bond prices and yields are inversely–related, QE can lead to a fall in bond yields and long-term interest rates more generally. If interest rates fall, this might then lead to an outflow of “hot money” as investors switch their funds into other currencies offering a higher return.

In this way, QE could lead to an outward shift in the supply of a currency in the foreign exchange markets, which (ceteris paribus) could then lead to a depreciation (fall) of the external value of a currency. Some of glut of extra cash inside the commercial banks might also be lent out externally to other countries which puts downward pressure on the value of a currency.

Evaluation points:

  1. QE increases bond prices – this might attract financial inflows into a country (and thereby increase currency demand) as investors seek capital gain
  2. QE usually leads to lower interest rates and therefore higher share prices. Positive expectations for rising share values could again attracts inflows of short-term financial capital into a country
  3. There is no guarantee that commercial banks will increase lending if there is an increase in QE – the impact on AD/inflationary pressures might be muted which will limit any direct effect on the currency

Subscribe to email updates from tutor2u Economics

Join 1000s of fellow Economics teachers and students all getting the tutor2u Economics team's latest resources and support delivered fresh in their inbox every morning.

You can also follow @tutor2uEconomics on Twitter, subscribe to our YouTube channel, or join our popular Facebook Groups.

Job board

Part-time Hourly Paid Teacher – Business Studies

Nelson & Colne College, Nelson, Lancashire


Related Collections

Teaching Vacancies


Advertise your vacancies with tutor2u

Much cheaper & more effective than TES or the Guardian. Reach the audience you really want to apply for your teaching vacancy by posting directly to our website and related social media audiences.

Find our more ›

Advertise your teaching jobs with tutor2u