Question

What is the significance and meaning of quantitative easing in the context of the liquidity preference model (increase in the quantity of money supplied).

Answer 1

Meaning and significance of quantitative easing in the context of liquidity preference model:-

Quantitative easing is an unconventional monetary policy in which a central bank purchases government securities or other securities from the market in order to lower interest rates and increase the money supply. Quantitative easing increases thecmoney supply by flooding financial institutions with capital in an effort to promote increased lending andliquidity. because The liquidity preference theory suggests that an investor demands a higher interest rate, or premium, on securities with long-term maturities, which carry greater risk, because all other factors being equal, investors prefer cash or other highly liquid holdings. Investments that are more liquid are easier to sell fast forfull value. According to the liquidity preference theory, interest rates on short-term securities are lower because investors are sacrificing less liquidity than they do by investing in medium-term or long-term securities. so that quantitative easing helps in the increase in the quality of money supplied.