Question

1) What is quantitative easing? Why have we seen it over the last few years and why is it possibly coming to an end?

Answer 1

Quantitative easing is a monetory policy wherein the central bank purchases government or other securities from the market so that interest rates can be reduced and money supply can be increased. It helps in increasing the money supply by flooding financial institutions with capital in order to promote lending. It does not involve printing of new currency.

Central bank targets the supply by buying or selling govt. bonds. When bank wants to encourage economy growth, it buys the bonds and vice versa.

However there are certain drawbacks because of which it is slowly declining. One such drawback is that if the central bank increases the supply of money so quickly, it can cause inflation. Further, it generally causes depreciation in the value of home currency.

Bank of Japan & European central bank have recently implemented quantitative easing.