Question

Identify how QE(Quantitative Easing in the Great Recession: case) may stimulate the economy, considering:

o Different sectors of the economy (e.g., households, banks, corporations), and

o Macroeconomic variables (e.g., inflation, bank lending, employment).

Answer 1

Quantitative easing refers to the increase in the money supply in the economy vy the central bank.

Impact on different sectors:

(i) Household - The household are able to obtain surplus funds from the banks at cheaper rate.With the increase availability of funds, the consumption by household increases.

(ii) Banks - As the money supply increases, the banks have more money to lend which further increases their lending activities and thus profitability in turn.

(iii) Corporations - With the increase in money supply in the economy, the firms and organisations are able to avail cheaper loans which further leads to the increase in investment avtivities.This further leads to the increase in the GDP of an economy.

Macroeconomic variables:

(I) Inflation - With the increase in the production activities due to the increase in the money supply, the inflation also increases as there is surge in demand for goods by the people when their income increases.

(Ii)Bank lending - The bank lending activities also increases with the increased availability of money supply.

(III) Employment - As the productivity activity increases, there is increase in the demand for labor by the firms which leads to the increase in the employment by the firms.