Reading Two: Why the Fed Is Watching China Closely
Quantitative Easing (QE) is an unusual form of monetary policy where a Central Bank –in this case, the Federal Reserve – electronically creates new money, increasing money supply to enable purchasing of financial assets, such as government bonds, government securities and other securities. (“What is quantitative easing?”, 2015) When short-term interest rates are near or approaching zero, this process is used to increase the private sectors’ economical spending, in order to return the inflation rate to a specified percentage. The Federal Reserve is in charge of managing the interest rates and monetary policy so that purchasing power is preserved, keeping inflation and unemployment to remain low. The Fed also …show more content…
This happens when the inflation rate falls under zero percent, thus being a negative rate. This is usually caused by a reduction in money supply or credit. (Investopedia, 2015) This can also happen through a decrease in government, investment or personal spending. Since deflation is the opposite of inflation, it can increase unemployment since there is a low demand for human resources in the economy. It is the Federal Reserve’s duty to keep the excessive price drops minimal. It is a concern to Canada and the global economy because if the price drops are not moderate, a persistent fall can have severe negative effect on economic stability and growth, causing a deeper crisis. As the general price levels fall, production will begin to slow down, causing inventories to be liquidated. Demand will then drop, in addition to employment falling. Once this happens, consumers will tend to conserve their money due to expecting an even further price drop. The defaults on debt will increase as well as depositors withdrawing cash, creating a lack of global liquidity and credit. (Investopedia, 2015) These are situations in which the Fed is made to
Quantitative Easing (QE) is an unusual form of monetary policy where a Central Bank –in this case, the Federal Reserve – electronically creates new money, increasing money supply to enable purchasing of financial assets, such as government bonds, government securities and other securities. (“What is quantitative easing?”, 2015) When short-term interest rates are near or approaching zero, this process is used to increase the private sectors’ economical spending, in order to return the inflation rate to a specified percentage. The Federal Reserve is in charge of managing the interest rates and monetary policy so that purchasing power is preserved, keeping inflation and unemployment to remain low. The Fed also …show more content…
This happens when the inflation rate falls under zero percent, thus being a negative rate. This is usually caused by a reduction in money supply or credit. (Investopedia, 2015) This can also happen through a decrease in government, investment or personal spending. Since deflation is the opposite of inflation, it can increase unemployment since there is a low demand for human resources in the economy. It is the Federal Reserve’s duty to keep the excessive price drops minimal. It is a concern to Canada and the global economy because if the price drops are not moderate, a persistent fall can have severe negative effect on economic stability and growth, causing a deeper crisis. As the general price levels fall, production will begin to slow down, causing inventories to be liquidated. Demand will then drop, in addition to employment falling. Once this happens, consumers will tend to conserve their money due to expecting an even further price drop. The defaults on debt will increase as well as depositors withdrawing cash, creating a lack of global liquidity and credit. (Investopedia, 2015) These are situations in which the Fed is made to