What are the problems associated with quantitative easing?

What are the problems associated with quantitative easing?

Expert Solution

The quantitative easing is a type of monetary policy in which a central bank purchases securities from the market with the aim of increasing the money supply in the economy which will in turn encourage lending and investment.

Problems with quantitative easing:

Inflation - Quantitative easing can lead increase the overall price level of goods and services in the market. The created money will increase the money supply in the economy which will lead to more money in the hands of people due to which the demand will increase more rapidly as compared to the supply and this excess demand will lead to inflation in the economy.

Exchange Rate Depreciation - When an economy pursues quantitative easing then there is always a risk of future inflation in the economy. This will lead to a fall in the value of domestic currency in terms of foreign currency which will cause a depreciation in exchange rate.

Rahul Sunny answered 2 years ago

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