Question

Over the month of march 2020, in an attempt to deal with the economic slowdown caused by the coronavirus . the fed announced and implemented a new QE program with an immediate $80 billion buy.

Do you think the $80 billion buy had an effect on the money supply?

If your answer is yes, please explain the size and nature of the possible effect.

Answer 1

Yes, the actional taken by the Fed will have a huge impact on the money supply.

Such a policy where the Fed buys the government bonds through QE is called Expansionary Monetary Policy. The $80 billion worth of purchase will increase the flow of money into the economy. This flow will increase the purchasing power of the people. They will start spending more on goods and servicees.

Higher spending leads to higher aggregate demand in the economy. Consequently, the output will rise.

The size would depend upon the multiplier value which is in turn depends upon the Marginal Propensity to Consume (MPC). Higher MPC implies higher multiplier value which multiplies the $80 billion into a manifold amount. So, the it is the multiplier which is working at the back-end that determines the size of the monetary policy action

The possible effect is increase in the Real GDP, employment levels and improved standard of living.