Log out Go to App
Go to App

Learning Materials

Features

Discover

Chapter 26: Problem 3

What is quantitative easing? Why have central banks used this policy?

Short Answer

Expert verified
Quantitative easing involves a central bank purchasing assets to increase the money supply and stimulate lending, traditionally used when standard policies like lowering interest rates are ineffective. Central banks use it to stimulate economic growth by fostering consumption and investment spending.

Step by step solution

01

Defining Quantitative Easing

Quantitative easing is a monetary policy where a central bank purchases government securities or other securities from the market in order to increase the money supply and encourage lending and investment. When short-term interest rates are at or approaching zero, normal open market operations, which target interest rates, are no longer effective, so instead a central bank can target specified amounts of assets to purchase. Quantitative easing increases the money supply by flooding financial institutions with capital in an effort to promote increased lending and liquidity.
02

Exploring the Use of Quantitative Easing

Central banks use this policy as a way of stimulating the economy. It is usually used when other options, such as lowering interest rates to near zero percent, have failed to spur growth. By purchasing assets, central banks infuse financial institutions with capital to promote lending and liquidity. The increased availability of credit enhances consumption and investment spending in the economy, promoting economic growth.

Unlock Step-by-Step Solutions & Ace Your Exams!

  • Full Textbook Solutions

    Get detailed explanations and key concepts

  • Unlimited Al creation

    Al flashcards, explanations, exams and more...

  • Ads-free access

    To over 500 millions flashcards

  • Money-back guarantee

    We refund you if you fail your exam.

Start your free trial

Over 30 million students worldwide already upgrade their learning with Vaia!

One App. One Place for Learning.

All the tools & learning materials you need for study success - in one app.

Get started for free

Most popular questions from this chapter

What are the key differences between how we illustrate an expansionary monetary policy in the basic aggregate demand and aggregate supply model and in the dynamic aggregate demand and aggregate supply model?

In explaining why monetary policy did not pull Japan out of a recession in the early \(2000 \mathrm{~s}\), an official at the Bank of Japan was quoted as saying that despite "major increases in the money supply," the money "stay[ed] in banks." Explain what the official means by saying that the money stayed in banks. Why would that be a problem? Where does the money go if an expansionary monetary policy is successful?

(Related to the Chapter Opener on page 900) An investment blog said about Fed Chair Janet Yellen: "She is arguably the world's most powerful woman, and perhaps the most powerful person in the world. Can you name anybody with more might?" Do you agree with this assessment? Briefly explain.

An article in a Federal Reserve publication observed that "20 or 30 years ago, local financial institutions were the only option for some borrowers. Today, borrowers have access to national (and even international) sources of mortgage finance." What caused this change in the sources of mortgage finance? What would be the likely consequence of this change for the interest rates borrowers have to pay on mortgages? Briefly explain.

How can investment banks be subject to liquidity problems?
See all solutions

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Study anywhere. Anytime. Across all devices.

Sign-up for free