Quantitative Easing

In the current economic climate a lot of us have heard about the term quantitative easing. It is a major topic of discussion in all the major newspapers and news channels all around the world. It has even become a topic of discussion among normal people. But only problem is that most of them don’t understand what Quantitative Easing means.  All they know is that it is some measure which the government is taking to fix the current economic recession.

What is Quantitative Easing?

Quantitative Easing is a monetary policy taken by the government, wherein the central bank of the country would go on and buy securities from various financial institutions.

The central bank is the entity responsible for maintaining the financial health of the nation. So when a country goes to recession(stagnation of economic activity), the central bank would print more money and inject it into financial institutions in the country by buying bonds or other securities from the banks. The idea is that when the banks have more money, it easier for businesses or private citizens to get loans. This will empower consumers to go and spend the money goods or services which they require thus creating an “Artificial Boom”.

What are benefits of QE?

Quantitative Easing is an external method by which the government of a country can revitalise the economy. It will improve business conditions of a stagnated economy and also improve job opportunities in the short term. You can consider QE as taking medicine to cure a sick economy.

Does QE have any side effects?

The main problem that can occur out of a QE is when the governments plan goes AWOL. The purpose of a Quantitative Easing is to improve the economic conditions of the country. The governments tries to do this by buying bonds or securities from banks. But if the securities that the government buys defaults(especially if they are mortgage securities), then the nation would enter into worse condition than before. Or if the extra money given to the banks are not used for providing loans to businesses or private citizens then also the same problem will arise.

All what the Quantitative Easing is trying to do is give a boost to the consumer so that the Demand and Supply gap would be minimal. Another impact of Quantitative Easing is that it will lead to inflation. Since more money is being injecting from thin air into the economy, there would be more money floating around in the system. And supply factor does not increase at par with the Demand factor, the prices of individual goods will tend to go up. Thus putting more burden on top of the common man.