Prepared by Sayed Hossain
May 6, 2011
Personal website : www.sayedhossain.com
www.sayedhossain.com
1.Explain what is meant by Quantitative
Easing and how it is done by the Fed.
2.Explain why QE is similar to conventional
(Traditional) monetary policy and also very
different.
3. Compare the arguments in favor of
completing QE2 with the arguments to end
QE2.
Traditional Monetary Policy
Sm
Rate of interest
10
Money supply is
decreased from $200
billion, to $150 billion
by FED.
7.5
ie
5
Dm
2.5
0
0
50
100
150
200 250 300
Money demanded
(billions of dollars)
Traditional Monetary Policy
Sm1
Sm
Rate of interest
10
A temporary shortage
of money. Interest rate
hikes to 7.5 percent in
money market
7.5
ie
5
Dm
2.5
0
0
50
100
150
200 250 300
Money demanded
(billions of dollars)
Traditional Monetary Policy
Sm
Rate of interest
10
7.5
ie
5
Dm
2.5
0
The money supply is
increased from $200
billion,to $250 billion by
FED.
0
50
100
150
200 250 300
Money demanded
(billions of dollars)
Traditional Monetary Policy
Sm Sm2
Rate of interest
10
7.5
ie
5
Dm
2.5
0
A temporary surplus
of money. Interest
rate is reduced
from 5 to 2.5
percent.
0
50
100
150
200 250 300
Money demanded
(billions of dollars)
Traditional Monetary Policy and
Quantitative Easing (QE2)
The targets of both the Traditional
Monetary Policy and Quantitative Easing
(QE2) are to increase Money Supply and
boost Spending.
Traditional Monetary Policy and
Quantitative Easing (QE2)
Traditional monetary policy targets Fed
Fund Rate while QE2 is targeting Quantity
of Money.
Traditional Monetary Policy and
Quantitative Easing (QE2)
The Fed Fund Rate is a target to control
Short Run Rate while QE2 is targeting
Long Run Rate to enhance Spending.
Traditional Monetary Policy and
Quantitative Easing (QE2)
Traditional monetary policy is generally
implemented by purchasing Short Term
Bond while QE2 is implemented by buying
Long Term Bond to control Long Run Cost
of Borrowing
Why Quantitative Easing (QE2) ?
As Fed Fund Rate has gone down to
Almost Zero Percent but fails to bring
fruitful results, FED has targeted Long
Run Rate under QE2 Program to enhance
Spending.
Why Quantitative Easing (QE2) ?
FED has targeted to Buy almost $900
billion Securities (with newly created
money) from Market to increase Quantity
of Money.
NEGATIVE IMPACTS OF QE2
NEGATIVE IMPACTS OF QE2
1. Prices of commodities, oil etc have gone
up. Meaning that Inflation is escalating
which is a Hidden Tax.
As a result, living standard is eroding.
NEGATIVE IMPACTS OF QE2
2.Value of dollar is depreciating meaning
that US Assets will be less lucrative.
As a result, the Capital/Financial Account
Balance of the United States will be
Squeezed.
NEGATIVE IMPACTS OF QE2
3. As the dollar is depreciation steadily, the
Confidence on US currency is eroding.
So, demand for gold and silver is
increasing and hence the prices of gold and
silver.
NEGATIVE IMPACTS OF QE2
4. US Credit Rating is declining meaning
that US government will have to pay
Higher Rates on its Bond.
Hence, deficit will be Increased further.
Hence, Debt.
.
POSITIVE IMPACTS OF QE2
POSITIVE IMPACTS OF QE2
1.Rate of Unemployment Dropped to 8.8
percent (March) but again Increased to 9
percent (April).
POSITIVE IMPACTS OF QE2
2. The risk of deflation has been tackled.
POSITIVE IMPACTS OF QE2
3. Stock prices have Increased, meaning
that households’ wealth have gone up.
Spending is likely to go up.
POSITIVE IMPACTS OF QE2
4.Value of dollar is depreciating meaning
that US exports will be increasing while
imports will decline.
As a result, the Current Account Balance
of the United States will be Healthy.
POSITIVE IMPACTS OF QE2
5.Although inflation is registered at 2.7 percent
(March), slightly higher than Target 2 percent.
It is still manageable.
6. GDP growth rate is Still Positive registered
at 1.8 percent in the first quarter of 2011.
Whether QE3 is desirable ?
I can comment on it after June 2011
when the QE2 would be ended by FED.
End