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  • Monetary Policy CS

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    Sebastian Zhang
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    This document discusses quantitative easing and its macroeconomic impacts. It explains that when interest rates are already low, central banks pursue quantitative easing by expanding their purchases of assets beyond just government bonds to inject more liquidity into the markets. This increased liquidity gives firms greater access to funds, boosting investments and asset prices. Rising asset values and investments then increase consumption by boosting wealth and confidence in the economy. However, quantitative easing has limitations and its effects depend on the response of consumption and investment to increased liquidity.

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    MP CS

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    1537459744_Monetary Policy CS

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    This document discusses quantitative easing and its macroeconomic impacts. It explains that when interest rates are already low, central banks pursue quantitative easing by expanding their purchases of assets beyond just government bonds to inject more liquidity into the markets. This increased liquidity gives firms greater access to funds, boosting investments and asset prices. Rising asset values and investments then increase consumption by boosting wealth and confidence in the economy. However, quantitative easing has limitations and its effects depend on the response of consumption and investment to increased liquidity.

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    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Flag for inappropriate content
    Download as pdf or txt
    23 views2 pages

    Monetary Policy CS

    Uploaded by

    Sebastian Zhang
    This document discusses quantitative easing and its macroeconomic impacts. It explains that when interest rates are already low, central banks pursue quantitative easing by expanding their purchases of assets beyond just government bonds to inject more liquidity into the markets. This increased liquidity gives firms greater access to funds, boosting investments and asset prices. Rising asset values and investments then increase consumption by boosting wealth and confidence in the economy. However, quantitative easing has limitations and its effects depend on the response of consumption and investment to increased liquidity.

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    © All Rights Reserved
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    of 2

    EXCHANGE RATE

    CONVENTIONAL QUANTITATIVE EASING


    INTEREST RATES EXPANDED SCOPE
    Central Bank will change OF ASSETS PURCHASES
    interest rates through open In economies where interest rates are
    market operations, usually already zero or close to zero, Central Bank
    via buying and selling of no longer finds it useful to lower interest
    government bonds. rates. Instead, it embarks on an expanded
    scope of asset purchases exercise beyond
    MACROECONOMIC IMPACTS just government bonds, hoping to inject
    liquidity into the markets directly.
    di
    Expansionary
    Lower interest rates will MACROECONOMIC IMPACTS MACROECONOMIC IMPACTS
    encourage Consumption &
    Investments Increasing AD With the injected liquidity into the market, The usual stance of the MAS Monetary Policy
    Increased economic growth firms may now have greater access to would be to allow for a modest and gradual
    & lower unemployment funds which will allow them to increase appreciation of the exchange rate.
    investments. The increase
    inc in demand for This would help with inflation in two ways.
    Contractionary assets will also increase asset prices, which
    Higher interest rates will A stronger SGD would make imports cheaper. This
    may boost household wealth, this may
    discourage Consumption & would reduce imported inflation, and also by reducing
    increase consumption. In addition, there
    Investments Decreasing AD prices of inputs, cost-push inflation also can be reduced.
    will be generally increased positive
    Lower inflation sentiments in the economy leading to A stronger SGD would make our exports more
    greater confidence, stimulating an expensive which may bring about a fall in demand
    LIMITATIONS increase in Consumption & Investments.
    inc for our exports, as (X-M) decreases,
    dec AD will decrease,
    general price level will fall, reducing
    1. Liquidity trap demand pull inflation.
    where interest rates are zero or LIMITATIONS
    close to zero, EMP not very useful Depreciation of the exchange rate LIMITATIONS
    2. Consumption & Investments (this can be useful if exports become
    cheaper as a result) Modest and gradual appreciation of the exchange rate
    might be interest rate inelastic
    may not be sufficient to address huge increase in prices
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