QE-ASSIGNMENT

QUANTITATIVE EASING

Institution name

Student name

Student reg number

Course code and name

Professor name

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Introduction

Due to the financial crisis of 2008, several financial institutions made efforts to

ensure that there is a goldilocks economy i.e. not too hot and not tool cold. They used some

of the means such as interest rate control to ensure that they had full control of financial crisis

problem. Some of the institutions that applied this system are; the Federal bank of American,

which introduced a zero interest rate on loans and the European Central bank. Despite using

the interest to control inflation, the financial regression still continued and they had to adopt a

new method that could help them solve the problem. The method adopted by this institution

was the quantitative easing which involves pumping of funds to the financial institution. The

process used by the central bank to pump this fund was that of buying bonds from the

financial institutions and pension funds. US Federal Reserve was able to create $ 3.7 TR for

the purchase of bonds. As a result of having more funds, the interest rate could go down as

the central bank tries to lower its rate towards zero. Therefore the aim of this paper is to

critically analyze the impacts of quantitative easing on the economy.

Impact of Quantitative easing on financial markets

The use of Quantitative easing has bolstered prices of assets and shares in the

country as well as the entire global financial market. Because of this, investors are now

forced to pay more in order for them to generate more income from investment in shares as

well as government bonds. The reason for this is that lowering interest rates results in a

decrease in the currency value hence lower returns.

Growth in gross domestic product

Fed concluded that there will be an increase in the gross domestic product due to the

ease of accessing funds by both investors and individuals. Through this, the economic

activates of the nation increase by 3% as mentioned by Ben Bernanke in the year 2012.

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Decrease in unemployment rate

More employment opportunities were created since privates sectors were able to

increase the number of jobs by two million.

Decrease in inflation

The government has been able to retain its current currency but increased banks

reserve amount hence inflation was nothing to be worried.

Claims made and evidence provided to support those claims

Inflation

It was pointed out that an increase in currency circulation in the market may lead to

inflation. Prof. Martin showed concern that if financial institutions reserves are increased then

they would also increase lending rate thereby leading to a high supply of funds to the public.

By doing this inflation rate will increase. His concern was answered by Mr. Bernanke who

said who mentioned that the QE1 was not actually meant to increase inflation since, during

this period, the policy had little effect on the amount of currency in circulation. These

assumptions actually occurred and can be evident in the current economy of FED.

QE would lead to economic growth through the availability of funds for investment

hence increase in the development of private sectors, which then help in the reduction of the

unemployment rate and growth in gross domestic product. QE ensures that firms have enough

capital to invest in its viable project. Most of this was obtained from financial institutions as

long term loan thereby making most businesses to have levered capital structure. Due to the

availability of cash in the market, share prices will increase since investors will be forced to

pay more in order to earn more from their investment.

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Reference

Market commentary - FT.com (2017, January 27). . Retrieved from https://ftalphaville.ft.com

Crosby, J., & Reuters (2016, October 5). Fed news: Stanley Fischer says low “natural

interest rate” a sign of potential economic trouble. The Fed. Retrieved from

http://www.cnbc.com/2016/10/05/fed-news-stanley-fischer-says-low-nautral-interest-

rate-a-sign-of-potential-economic-trouble.html

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