Question

Explain how QE can have a positive effect on the U.S. exchange rate and subsequently on the real economy? Illustrate graphically your answer.

Answer 1

Quantitive easing is just an extension of the usual business of open market operations. It is meant to stimulate a sluggish economy when the open market economy fails to normalize. Though it decreases the value of the currency it lowers the domestic interest to encourage greater borrowing and greater spending. The federal reserve focused on buying two assets i.e. treasury bonds or assets backed by home loans. More demand from the fed or less supply raises price hence many of the sellers these assets buy other assets pushing their prices as well. In this way fed drives down the rate of interest on long-term borrowings which is paid by households and firms