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Quantitative easing (QE) is an unconventional monetary policy used by central banks to stimulate 
the economy when standard monetary policy has become ineffective 
The central bank is an institution that manages a state’s (or several states’) currency, money supply, 
and interest rates. 
Basically, it describes a form of monetary policy used by central banks to increase the supply of 
money in an economy when the control bank interest is close to 0. 
How does it work: 
- On one side businesses and consumers reduce their spending. On the other side, banks 
don’t lend money because they are scared they will not get it back. Instead, they buy 
treasuries because it is a safe way to make money, whereas consumers and businesses are 
not. 
- So the way for the central bank to get banks to lend money and make the economy works is 
to put money inside directly. For that, the central bank buys assets banks have obtained.. 
- To buy those assets, the central bank has to create money electronically, this money will be 
then transferred to the bank. 
- Therefore, by buying those treasuries, the central bank increase their prices and lower their 
yield (the income return on an investment), which lead the bank not to buy the bounds again, 
because there is no money to make. 
- In the end, it forces banks to find other investments by normal business loads. Thus, lower 
yields reduce the cost of borrowing for businesses and households, making more likely to 
spend. 
- Bank can also buy directly assets of the companies. This should increases spending to help 
keeping inflation around the governments’ 2% target. 
- 
QE1: December 2008 - June 2010 
Purchased MBS that had been originated by Fannie Mae, Freddie Mac, or the Federal Home Loan 
Banks. 
• QE2:.November 2010 - June 2011 
• $600 billion of Treasury securities. The Fed was actually hoping to spur inflation a bit by increasing 
the money supply. Expectations of inflation increase demand, which would spur economic growth 
QE achieved some of its goals: 
It removed toxic subprime mortgages from banks. Balance sheets 
It also helped to stabilize the U.S. economy, providing the funds and the confidence to pull out of the 
recession. 
It kept interest rates low enough to revive the housing market. 
It did stimulate economic growth, although probably not as much as the Fed would have liked.
The impact and risk of Quantitative Easing 
Quantitative easing can fuel economic growth since money funneled into the economy 
should allow people to more comfortably make purchases. This can have a trickle down 
effect on both the consumer and business communities, leading to increased stock market 
performance and GDP growth. 
1. Foster maximum employment: The experts argue that money printed through the QE 
program can be used to help create new jobs for people since businesses should end up with 
more cash on hand to finance new hiring. 
2. Encourage lending: The general premise behind this claim is that central banks can reduce 
long-term interest rates by buying treasuries. In providing financial institutions with more 
cash, these institutions should be more willing to lend out money at lower rates. Such loans 
then act to further stimulate the economy through higher consumer spending and business 
development. 
3. Encourage borrowing: Low interest rates tend to encourage increased borrowing. Although 
this can help stimulate the economy, some argue it also has the tendency to encourage 
customers and businesses to take on unnecessary debt. At the same time, some level of debt 
and leverage is essential to the growth of any economy. 
4. Increase spending. The theory is that as more money enters the economy, consumers will 
have more to spend. This will in turn increase company profits and create more jobs, helping 
stimulate the stock market. Ultimately, these factors should result in newfound consumer 
confidence and an economic recovery. 
5. Complement low interest rates. Another tool used to stimulate the economy is the federal 
funds rate. By setting this rate low, the central bank can effectively encourage lending. As a 
result, quantitative easing gave the central bank another monetary tool to stimulate the 
economy through an increased money supply. 
However, QE cannot simply generate wealth, and the drawbacks and potential risks of 
even more QE will become greater the more money has been created already. Thereby, QE 
has several drawbacks worth to consider. 
1. It drives inflation much higher. This is the biggest concern around quantitative easing. As 
more money circulates through the economy, prices rise. Why? While the supply of money 
increases, the supply of goods remains the same. Thus, the competition for each good 
increases, leading to increased prices, which in turn leads to inflation. Excessive inflation 
leads to distortion of prices and incomes, and can cause an economy to operate inefficiently. 
2. It creates dangers with international trade. Newly printed money can be used by the 
government and consumers to import new goods and services from other countries. These 
goods and services are more or less coming in for free. In other words, the value of the 
importer’s currency decreases, which can discourage exporters.
3. Threat to the money value. Many countries get frustrated with attempts at currency 
manipulation like quantitative easing. They feel that these practices reflect an inability by the 
country to generate real growth and to honor debts. For example, other countries have become 
weary of lending the U.S. more money. Also, the status of the U.S. dollar as the world reserve 
currency is in jeopardy, likely because of quantitative easing. 
4. Benefits do not exist QE programs. When the central bank stops printing money, the 
recovery often gets put on hold, or worse, begins to reverse. Although the hope is that new 
consumer confidence will inspire a real recovery, many feel these programs are only a short-term 
fix. This effect is exhibited by the fact that stock markets often fall when it is announced 
or speculated that the quantitative easing program will be brought to an end. 
5. Encourages debt. Another key worry about quantitative easing is that the increased money 
supply and low interest rates encourage additional borrowing by both consumers and 
businesses. While some debt can help stimulate an economy, wanton loans and excessive debt 
can further exacerbate an already fragile one. 
The important thing to remember is that quantitative easing generally leads to short-term 
benefits with the risk of exacerbating long-term problems. As a result, it is often used as a 
last resort when the economy faces a great risk of a recession or depression.

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Quantitative easing

  • 1. Quantitative easing (QE) is an unconventional monetary policy used by central banks to stimulate the economy when standard monetary policy has become ineffective The central bank is an institution that manages a state’s (or several states’) currency, money supply, and interest rates. Basically, it describes a form of monetary policy used by central banks to increase the supply of money in an economy when the control bank interest is close to 0. How does it work: - On one side businesses and consumers reduce their spending. On the other side, banks don’t lend money because they are scared they will not get it back. Instead, they buy treasuries because it is a safe way to make money, whereas consumers and businesses are not. - So the way for the central bank to get banks to lend money and make the economy works is to put money inside directly. For that, the central bank buys assets banks have obtained.. - To buy those assets, the central bank has to create money electronically, this money will be then transferred to the bank. - Therefore, by buying those treasuries, the central bank increase their prices and lower their yield (the income return on an investment), which lead the bank not to buy the bounds again, because there is no money to make. - In the end, it forces banks to find other investments by normal business loads. Thus, lower yields reduce the cost of borrowing for businesses and households, making more likely to spend. - Bank can also buy directly assets of the companies. This should increases spending to help keeping inflation around the governments’ 2% target. - QE1: December 2008 - June 2010 Purchased MBS that had been originated by Fannie Mae, Freddie Mac, or the Federal Home Loan Banks. • QE2:.November 2010 - June 2011 • $600 billion of Treasury securities. The Fed was actually hoping to spur inflation a bit by increasing the money supply. Expectations of inflation increase demand, which would spur economic growth QE achieved some of its goals: It removed toxic subprime mortgages from banks. Balance sheets It also helped to stabilize the U.S. economy, providing the funds and the confidence to pull out of the recession. It kept interest rates low enough to revive the housing market. It did stimulate economic growth, although probably not as much as the Fed would have liked.
  • 2. The impact and risk of Quantitative Easing Quantitative easing can fuel economic growth since money funneled into the economy should allow people to more comfortably make purchases. This can have a trickle down effect on both the consumer and business communities, leading to increased stock market performance and GDP growth. 1. Foster maximum employment: The experts argue that money printed through the QE program can be used to help create new jobs for people since businesses should end up with more cash on hand to finance new hiring. 2. Encourage lending: The general premise behind this claim is that central banks can reduce long-term interest rates by buying treasuries. In providing financial institutions with more cash, these institutions should be more willing to lend out money at lower rates. Such loans then act to further stimulate the economy through higher consumer spending and business development. 3. Encourage borrowing: Low interest rates tend to encourage increased borrowing. Although this can help stimulate the economy, some argue it also has the tendency to encourage customers and businesses to take on unnecessary debt. At the same time, some level of debt and leverage is essential to the growth of any economy. 4. Increase spending. The theory is that as more money enters the economy, consumers will have more to spend. This will in turn increase company profits and create more jobs, helping stimulate the stock market. Ultimately, these factors should result in newfound consumer confidence and an economic recovery. 5. Complement low interest rates. Another tool used to stimulate the economy is the federal funds rate. By setting this rate low, the central bank can effectively encourage lending. As a result, quantitative easing gave the central bank another monetary tool to stimulate the economy through an increased money supply. However, QE cannot simply generate wealth, and the drawbacks and potential risks of even more QE will become greater the more money has been created already. Thereby, QE has several drawbacks worth to consider. 1. It drives inflation much higher. This is the biggest concern around quantitative easing. As more money circulates through the economy, prices rise. Why? While the supply of money increases, the supply of goods remains the same. Thus, the competition for each good increases, leading to increased prices, which in turn leads to inflation. Excessive inflation leads to distortion of prices and incomes, and can cause an economy to operate inefficiently. 2. It creates dangers with international trade. Newly printed money can be used by the government and consumers to import new goods and services from other countries. These goods and services are more or less coming in for free. In other words, the value of the importer’s currency decreases, which can discourage exporters.
  • 3. 3. Threat to the money value. Many countries get frustrated with attempts at currency manipulation like quantitative easing. They feel that these practices reflect an inability by the country to generate real growth and to honor debts. For example, other countries have become weary of lending the U.S. more money. Also, the status of the U.S. dollar as the world reserve currency is in jeopardy, likely because of quantitative easing. 4. Benefits do not exist QE programs. When the central bank stops printing money, the recovery often gets put on hold, or worse, begins to reverse. Although the hope is that new consumer confidence will inspire a real recovery, many feel these programs are only a short-term fix. This effect is exhibited by the fact that stock markets often fall when it is announced or speculated that the quantitative easing program will be brought to an end. 5. Encourages debt. Another key worry about quantitative easing is that the increased money supply and low interest rates encourage additional borrowing by both consumers and businesses. While some debt can help stimulate an economy, wanton loans and excessive debt can further exacerbate an already fragile one. The important thing to remember is that quantitative easing generally leads to short-term benefits with the risk of exacerbating long-term problems. As a result, it is often used as a last resort when the economy faces a great risk of a recession or depression.