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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

Quantitative easing will lead to the following changes in the economy:

  • Increased money supply in the economy after quantitative easing will reduce the interest rates to near zero or zero.
  • At this low rates, the marginal efficiency of capital will be very high. And the businesses will be free to expand their functions.
  • This will increase the investment process in the economy. Due to increase investment, the business firms will start hiring more and more people.
  • Increased employment will increase the income in the hand of the people and they will demand more product.
  • This increased demand will pull the economy out of the recession. And once the demand for goods stabilizes the demand for the assets price will also increase.

Or we can have a more direct approach:

  • Due to low-interest rates, people will borrow more and spend more. This will increase the aggregate demand in the economy. The prices will rise because people will demand more and firm producing more to meet the demand will employ more reducing unemployment. After the demand for other things stabilizes the assets price will also increase.

Rahul Sunny answered 2 years ago
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