Quantitative Easing Essay Example | Topics and Well Written Essays - 1250 words

Quantitative Easing - show ExampleThis act expands the excess reserves of banks and lowers the yield since the prices of the financial assets rise (Wieland & Research., 2009).Since this is a type of a monetary policy, it also includes expansionary and contractionary monetary policies. Expansionary policies include those in which the central bank purchases judicature bonds (short-term) in frame to bring down the market interest rate. When interest rates are at zero and handed-down monetary policy cannot be brought into play, quantitative substitute is used to further boost the prudence, and not except are short-term bonds purchased, but long-term bonds are purchased as well, and the yield would be most in all probability to increase. (Economist, 2005)This policy helps to keep inflation at the right percentage, neither too low nor too high. However, easing can become over-effective and result in deflation or be ineffective and lead to banks not loaning out additional reserves ( Economist, 2005).As aforementioned, the central bank imposes a monetary policy by a rise or fall in the interest rate. Then the interest rate drive is also achieved by open market operations, which essentially involves the buying or selling of short-term government bonds from financial institutions including banks. The process involves the central bank lending out bonds, collecting the money from these bonds purchased, and this in influence changes the money supply in the economy and at the same time affects the price of government bonds, so far though just the short-term ones. This entire process changes the interbank rates of interest (Fukasawa & Corporation, 2000).A liquidity sand trap occurs when the central bank cannot change the interest rate. Quantitative easing is then used to boost the economy without referring to the interest rate. The aim of quantitative easing is to affect the money supply and not the interest rate, which is unsurmountable to reduce in any case. And this is referred to as a last resort policy in