Understanding Quantitative Easing
Rohit Basbanand Dhoundiyal
Once upon a time.....
`Lets say there was a
prosperous village, where villagers are into agriculture. The village has schools, shops, entertainment, hospitals etc.
One day, a well respected pundit arrived in the village.
The villagers believed the pundit was blessed with the ability to
predict the future.
Meeting was held in the village and the pundit
predicted that the villagers would lose their job & source
of livelihood.
The villagers began to save their money like there was
no tomorrow.
Shops were deserted. The demand for all the goods and services dropped and resulted in
drop in prices.
There was economic instability.
Fall in demand led to closing of shops which led
to shortage of goods.
People also started losing their jobs.
By sensing the problem, Govt. Officials made an
announcement.
Key points of the announcement
Money would be available at 0% interest.
No upper limit for the borrowing.
Pay their debts on future date.
Quantitative Easing
A process of increasing the money supply by flooding financial institutions with capital in an effort to promote increased lending and liquidity and stop credit crunch situation.
The fund is created electronically not physically.
Circular flow of money
FirmsFinancial
Institutions/BanksIndividuals
Savings/Investments
Loans
Loans
Savings
Income
Factors of production
Goods/Services
Revenue
Methods
Interest Rate
Open market operations(OMO)
Effects of Quantitative Easing
Inflation
Standard of living
Depreciation of currency
Investment in assets
History of QE
Bank of Japan in early 2000’s
US Federal Reserve from 2008-13
European Central Bank in 2009
Bank of England in 2009–10
Questions?
Why electronic funds rather than physical funds?
Concept of Yield & Price?
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