Qe2 Q&a

1. What does “Quantitative Easing” mean? Is this fiscal or monetary policy? What is the President’s and Congress’s formal role in this decision?

Quantitative Easing is a government monetary policy used to increase the money supply in the market. It is done by purchasing securities from the market. Its goal is to increase the money supply by flooding financial institutions with capitol to promote increased lending and liquidity. The President and Congress have no formal role in the decision making process and the Fed does not need their approval to make these types of decisions.

2. Explain how the Fed is physically executing QE2 in the context of market transactions.

The Fed is physically executing QE2 by purchasing $600 billion in treasury debt over an eight month period at a rate of $75 Billion per month. The newly created money will stimulate the economy and help create jobs.

3. Why did the announcement of QE2 result in increases in the stock market?

The announcement resulted in increases in the stock market due to anticipation of the increased amount of money being added which will drive the price of the dollar down. Investors are liquidating treasuries and other government bonds and buying equities and commodities which supports the U.S. Stock market and causes the increases by driving commodity prices higher.

4. One member of the Fed Policy Committee voted against QE2. Why? What is he worried about? Why do others believe this is not a concern?

Thomas Hoenig said that the costs of the QE2 plan did not outweigh the benefits. He believed that this plan could cause future instability and make the recovery efforts even more difficult. He believed that this was a short-term fix and that efforts needed to be made that would have a long term positive effect. Others believe this is not a concern because there is so much spare capacity in the economy. They believe this measure will speed up the rate at which the economy is expanding.

5. If...