money and banking economics Case Study: Impact of Quantitative Easing on Interes
ID: 1174031 • Letter: M
Question
money and banking economics
Case Study: Impact of Quantitative Easing on Interest Rates The following are selected economic data for the U.S. economy Year M1 (S ba) | Fed Fund Rate (%) | Real GDP (S bn) | GDP Deflator 2007 1,372 5.02 13,299 106.3 2008 1,433 1.92 13,229 108.6 2009 1,637 0.16 12,881 109.6 2010 1,744 0.18 13,249 110.7 1. What is the impact of the U.S. Fed's Quantitative Easing (QE) technique on the money supply? 2. Why did the Fed implement QE? And what does it intend to achieve? 3. What is the theory according to which the interest rate (as represented by the Fed fund rate) is determined? 1 2Explanation / Answer
The money supply increased from $1,372 bn in the year 2007 to $1,744 bn in 2010 as a result of the Fed's quantitative easing.
As a result of the global financial crisis, the Federal Reserve had to resort to quantitative easing in order to increase the money supply in the US economy. The financial crisis had led to the contraction of the United States' Gross Domestic Product (GDP) and thousands of jobs were lost in the economy every month. Therefore, the Fed increased its balance sheet using Quantitative Easing as the tool to increase the money supply in the economy and prevent further shocks that had gripped the world economy and US economy in the backdrop of the global financial crisis of 2007.
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