The Federal Reserve headed by Ben Bernanke announced that they will buy $85 bill

Question

The Federal Reserve headed by Ben Bernanke announced that they will buy $85 billion dollars of government bonds each month until the unemployment rate reaches 6.5%. These purchases are known as quantatative easing because more money is placed into circulation and it keeps interest rates artificially low. Express your view on this FED action. You can be PRO or CON but explain the future consequences of this action on the economy and the inflation rate. Please indicate the documentation on your research.

Explanation / Answer

Quantitative easing (QE) is an unconventional monetary policy used by central banks to stimulate the national economy when standard monetary policy has become ineffective.[1][2] A central bank implements quantitative easing by buying financial assets from commercial banks and other private institutions, thus creating money and injecting a pre-determined quantity of money into the economy. This is distinguished from the more usual policy of buying or selling government bonds to change money supply, in order to keep market interest rates at a specified target value.[3][4][5][6]

Expansionary monetary policy typically involves the central bank buying short-term government bonds in order to lower short-term market interest rates.[7][8][9][10] However, when short-term interest rates are either at, or close to, zero, normal monetary policy can no longer lower interest rates. Quantitative easing may then be used by the monetary authorities to further stimulate the economy by purchasing assets of longer maturity than only short-term government bonds, and thereby lowering longer-term interest rates further out on the yield curve.[11][12] Quantitative easing raises the prices of the financial assets bought, which lowers their yield.[13]

Quantitative easing can be used to help ensure that inflation does not fall below target.[6] Risks include the policy being more effective than intended in acting against deflation – leading to higher inflation,[14] or of not being effective enough if banks do not lend out the additional reserves.[15] According to the IMF and various other economists, quantitative easing undertaken since the global financial crisis has mitigated the adverse effects of the crisis.[16][17][18]

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.