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how would a macroeconomist describe the transmission mechanism of QE leading to changes into output, employment...

how would a macroeconomist describe the transmission mechanism of QE leading to changes into output, employment and good prices and asset prices?

Solutions

Expert Solution

The transmission mechanism will be as follows:

  • Due to increased money flow after quantitative easing, the interest rates in the country will fall.
  • The fall in the interest rate will increase the marginal efficiency of the capital and investors may increase the spending process.
  • Increased spending in the economy will lead to more employment and people will get jobs.
  • With the increased income, they will demand more and this will take the economy out of the recession.
  • This will increase the output and increase the prices and decrease the unemployment in the market.
  • With more income, the asset price will also increase.

The second transmission will be more direct:

  • With the increased money supply, loans and borrowing will become cheaper. People will have more easy money in their hand and they will demand more of goods. This will shift the aggregate demand and pull the economy out of recession.  

Rahul Sunny answered 2 years ago
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