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ECB Reflects on Delayed Response to 2021–2022 Inflation

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In a rare moment of reflection, the European Central Bank (ECB) acknowledged that it had reacted too late to the surge in inflation during 2021–22. At the time, the ECB had committed to maintaining interest rates at record lows while it continued quantitative easing. —reuters.com

Answer the following questions to check your understanding of the story.

1) What is quantitative easing?

Quantitative easing is ____________.

Wrong! - How do open market sales of securities change bank reserves? How do open market purchases of securities change bank reserves? Which action provides quantitative easing?

That's Right! - Quantitative easing is large open market purchases of securities from banks by a central bank. The central bank pays for these securities by making a deposit into the banks’ reserve deposits at the central bank.

2) What policy action could the ECB have taken to slow the surge in inflation in 2021-2022?

To slow the surge in inflation in 2021–2022, the ECB could have _______________.

Wrong! - Would lowering the policy interest rate slow inflation? If the required reserve ratio decreases, what happens to the quantity of money and the inflation rate? What are excess reserves? How do excess reserves influence inflation?

Well Done! - The ECB could have abandoned its commitment to keep interest rates at record low levels and raised the policy interest rate.

3) What would have been the effect of the ECB’s policy action in question 2?

Wrong! - When the ECB raises its policy interest rate, does a change in aggregate demand or short-run aggregate supply occur? How does a change in the policy interest rate influence the quantity of money?

Good Job! - When the ECB raises its policy interest rate, other interest rates rise. Eventually consumption expenditure and investment growth slow and aggregate demand growth slows. The inflation rate falls.

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