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Assessment 2 - Essay Example

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Quantitative easing is the creation of new money and increasing its amount supplied while at the same time sinking the pressures on the banks, which is normally because of liquidity shortage risks. Thus, the increased supply of money increases the liquidity and the reserves…
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Assessment 2
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Assessment 2

Download file to see previous pages... raditional operation of open market policy, whereby the federal government buys and sells securities to change money supply to keep federal fund rates at a specified target value (Carbaugh, 2013, p. 361).
Historically, researchers perceived QE as being negative to the currency because increase in supply of money may lead to inflation thus devaluing state’s currency (Yotov, 2013). However, in recent years there have been arguments suggesting QE is not necessarily bad for the currency. These arguments imply that there are benefits to QE when its usage is for the creation of inflation to avoid deflationary periods in the economy. This leads to quick economic recovery after a prolonged recession (Yotov, 2013, p. 64).
According to Carbaugh (2013, p. 361), QE is not an exact science and there exists a debate on its effectiveness or lack thereof. Nevertheless, QE is a last resort measure used to stimulate the economy.
The US Federal government has utilized quantitative easing several times. The first time was in 2008 that extended until March 2010. The original value was supposed to be $600 billion but in the end, the Fed had used $1.75 trillion (Costa, 2014). This Fed spread the amount on the mortgage-backed securities and the Treasury notes. The second quantitative easing included adding $600 billion in form of Treasury securities, which are long-term in nature (Costa, 2014). The Federal purchased the Treasury securities from November 2010 to 2011 June. The quantitative easing had several effects on the US interest rates and money market (Costa, 2014).
The first effect of the QE was that it resulted to a surge of stock prices. When the Fed announced the first QE, money market experienced a big rally in the prices of stock. The S&P 500 gained by 36.4 percent when it elevated from 857.4 to 1,169.4 (Costa, 2014). The increase was from 25 November 2008 to 31 March 2010. The second QE fuelled the rally even more as the S&P 500 gained by 26 percent when it increased ...Download file to see next pagesRead More
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