Taking a Look at Quantitative Easing

1043 Words Feb 4th, 2018 4 Pages
An OMO is where the CB buys short-term bonds to increase the money supply. The CB’s across the globe had to use a monetary policy instead of a fiscal policy, partly due to countries sovereign debt problems . The CB’s were buying short-term bonds until the real interest rate fell to zero. When the real interest rate fell to zero it created liquidity trap. And CBs had to look to unconventional monetary policies to create a higher output. This paper will seek to answer if unconventional monetary policies, specifically quantitative easing (QE), were effective on the economy or not. First, this paper will explain what liquidity trap and how it is relevant. Second, it will explain how QE work. Third, it will conclude if QE were effective or not. To question whether QE were effective or not it will use the American economy. This paper will illustrate liquidity trap and QE by using the models: MS-MD, IS-LM and AS-AD.

Liquidity trap is when short-term interest rate on short-term bonds falls close to zero or zero and OMO has no affect on the interest rate. When the interest rate are close or at zero, the demand curve is flat or very elastic, so an increase in the money supply will not have any affect on the interest rate. The demand curve for money is flat because people are anticipating a deflation or any negative shock to the economy, and…

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