Question

Describe quantitative easing as a tool of monetary policy? What distinguishes it from the other policy tools of the Federal Reserve? What was the Fed's objective in implementing quantitative easing?

Answer 1

The quantitative easing is the process of buying government securities by the Fed to increase the money supply in the economy. The quantitative easing is an expansionary monetary policy, unlike the other tools of monetary policy the quantitative easing directly influence the money supply in the economy and it is the most used monetary policy tool. The other tools controls the money held by the commercial banks such as the discount rate, cash reserve ratio etc... These tools have indirect effect on the money supply.

By introducing a quantitative easing the central banks looks for decreasing the interest rate and there by increasing the economic growth in the economy. When the interest rates is lower more people go and take out the loan and invest and this stimulates the aggregate demand and there by increase the economic growth.