Quantitative Easing : An Unconventional Monetary Policy Essay example

879 Words Jul 25th, 2015 4 Pages
Quantitative Easing, as defined by Investopia, is an unconventional monetary policy in which a central bank purchases government securities or other securities from the market in order to lower interest rates and increase money supply. In short, in times when standard monetary policy has become useless, this is used by central banks to help stimulate the economy. Quantitative easing is used when short-term interest rates are close to that of zero, and no new money is needed to be printed in the process. This is used to increase an institutions money supply by adding additional capital to use towards lending.

As hard as it is to believe there is a finite amount of cash floating around any economy, a large portion of the money in a financial system actually does not exist other than in a computer. When banks and other institutions stop lending, this prevents the actual physical cash from being injected into the economy and reduces the multiplier effect. By purchasing bonds, the central bank drives down market interest rates, making it cheaper for businesses and consumers to borrow. That 's because the purchases drive up bond prices, which move in the opposite direction of interest yields. So Qualitative Easing can make credit cheaper and more abundant. This is a good thing because credit is a key factor in economic growth. Businesses borrow to expand production. Consumers borrow to buy houses or large items such as cars.

Other tools used in todays economy, that differ from…

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