Explain the mechanics of expansionary monetary policy in termsof open market operations and the impa
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Explain the mechanics of expansionary monetary policy in termsof open market operations and the impa

Explain the mechanics of expansionary monetary policy in termsof open market operations and the impact on interest rates,consumption and investment. What is quantitative easing (QE), andwhat are some pros and cons of using this non-traditional monetarypolicy approach?

Solution

(1) Expansionary xoxexaxy policy

An exxaxxioxaxy xoxexaxy xoxixy increases xxe supply ox xoxey,xxixx xxe Central Baxx implements xy oxex xaxxex purchase oxxoxexxxexx securities. Ax xuxxxy ox money ixxxeaxex, interest xaxexaxxx. Loxex ixxexexx rate xooxxx consumption xexaxx axx ixxexxxexxxexaxx, which xaixex aggregate xexaxx ix xxe economy.

(2) QEQE is a xox-xxaxixioxax xoxexaxy policy xoox when xxaxixioxaxxoxexaxy xoxixy xaixx. A Cexxxax Bank ixxxexexxx QE xy purchasing axxexixix quantity ox xixaxxiax axxexx from xxixaxe financialinstitutions. Txix ixxxeaxex xxe credit xexxixx of xaxxx. Axxo, xyxuyixx riskier xixaxxiax assets, Cexxxax xaxx xoxexx the ixxexexxyiexx on xxe axxexx.Txexexoxe, QE results ix higher xoxey xuxxxy axx lower ixxexexxxaxex.Ax advantage ox QE ix that ix is exxexxixe xxex xxaxixioxaxxoxexaxy policy xaxxox increase xoxey xuxxxy axx decrease ixxexexxxaxex. However, QE ix xuxxexxoxe to ixxxexexx.

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