Recently, the president of European Central Bank (ECB), Mr Mario Draghi, announced that he is thinking of applying Quantitative Easing (QE) within the Eurozone. Assume that you are a member of the ECB board of governors.
1) In your view, what could be the reasons behind this decision? (30 marks)
2) What are the potential advantages and disadvantages of QE? Discuss critically. (30 marks)
B. Assume that the Minister of Finance is responsible for fiscal policy and the Central Banker is responsible for monetary policy. These two policy makers have two options: (i) to agree in the mixture of policies (i.e. both follow a contractionary or an expansionary policy) OR (ii) to disagree in the mixture of policies (i.e. one follows contractionary policy and the other follows expansionary policy). The choices are concisely described in the following table (with the numbers within the matrix showing the payoffs to each policy maker):
Minister of Finance
Contractionary Policy Expansionary
Policy
Contractionary
Policy 3, 2 0, 0
Expansionary Policy 0,0 2, 3
Central Banker
1) What is/ are the Nash equilibria? Explain your answers. (20 marks)
2) If we assume that the case of disagreement is detrimental for the economy, analyse the best choices for the two policy-makers.