Lenders and borrowers are all so nervous that the huge planned increase in the m

Question

Lenders and borrowers are all so nervous that the huge planned increase in the money supply ,refrred to as 'quantitative easing' , may have much smaller stimulating effect than it would have in normal circumstances.This strategy is not without risks in terms of future....

a-this clip is from 2008.why would lenders and borrowers both be nervous?

b-why would the stimulating effect be smaller than normal ?

c-what does this tell us about the income multiplier with respect to the money supply?

d- Complete the final senence ?

Explanation / Answer

a) Lenders are nervous because quantative easing has increased money supply leading to a dramatic decrease in the interest rates and the yield on the long term 10 year government securities are very less now compared to 2007. This is a bad signal for the long term savers like pensioners who depend on the interest income. On the other hand, the borrowers are worried as the Fed is saying there will not be any increase in interest rates in the near future or in short term, this suggests that the interests might go down much further in near future. This demotivates current investments and the growth is halted. b- The Fed fund rate is almost zero, therefore, the stimulating effect might not cause a much expected change income levels. c- The effectiveness of a monetary policy is judged by increase in income or income multiplier with respect to money supply. Higher this ratio higher will be the effectiveness. For ex: an increase in money supply by $2 billion increases income by $10 billion than the income multiplier with respect to money supply$10/$2 = 5 times In the above case, during the 2008 QE we can say that the ratio will be lower. d- The strategy is not without risks in terms of higher inflation due to increased money supply (the Fed is literally printing more money), and there will be higher budget deficit. Furthermore, the value of the dollar and its acceptance as a prime currency may fall dramatically

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