Quantitative Easing

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|Quantitative Easing Presentation Group 1 |

|‘Define ‘Quantitative Easing’ and explain its intended effects in the US. How can the Fed exit US financial markets most effectively? Has Quantitative Easing |

|been effective?’ |

Quantitative Easing Explained

WHAT IS QUANTITATIVE EASING?

Quantitative easing is an unconventional approach utilised by central banks to increase the supply of money when bank interest rates reach close to or are at zero (Insider 2010). ‘Quantitative’ refers to the definite quantity of money generated and ‘easing’ refers to reducing the stress on the bank (BBC 2012). High risk of low inflation can lead to Quantitative easing. Monetary policy makers use QE during extreme circumstances and with due consideration (BBC 2012).

HOW DOES QUANTITATIVE EASING WORK?

The Central Bank, an entity responsible for creating and issuing new money electronically, credits its own account with newly created money (Smith 2010). The central banks play a vital role in QE since they are liable for making the monetary policies such as the creation and issuing of money (Smith 2010). This new money is used to purchase assets such as government bonds and Corporate bonds from financial institutions (Editor 2009). The Central Bank takes two approaches: 1) by injecting money into the economy, the commercial banks get flooded with excess reserves. The excess reserves encourage businesses and individuals to borrow money by pushing down the interest rates and hence increase the economic activities. (BOE 2009). 2) Another effect is, the...