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What is quantitative easing and how does it work ; Is it an effective monetary policy tool ? Video Lecture | Indian Economy for Government Exams (Hindi) - Bank Exams
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| 1. What is quantitative easing and how does it work? |  |
Ans. Quantitative easing (QE) is a monetary policy tool used by central banks to stimulate the economy when traditional methods, such as lowering interest rates, become ineffective. It involves the central bank buying government securities or other financial assets from commercial banks and other financial institutions. This increases the money supply, lowers interest rates, and encourages lending and investment to boost economic activity.
| 2. Is quantitative easing an effective monetary policy tool? | |
Ans. Quantitative easing can be an effective monetary policy tool in certain situations. It aims to boost economic growth by increasing money supply and lowering interest rates, which can stimulate lending, investment, and consumer spending. However, its effectiveness depends on various factors such as the state of the economy, the level of interest rates, and the willingness of banks to lend. It also carries the risk of inflation if not carefully managed.
| 3. How does quantitative easing impact interest rates? | |
Ans. Quantitative easing impacts interest rates by increasing the money supply and reducing the yield on government securities. When the central bank purchases these securities, it injects money into the financial system, which increases liquidity. This excess liquidity pushes down interest rates, making borrowing cheaper for businesses and individuals. Lower interest rates can stimulate borrowing and investment, leading to economic growth.
| 4. What are the risks associated with quantitative easing? | |
Ans. There are several risks associated with quantitative easing. One of the main risks is the potential for inflation as increased money supply can lead to higher prices. It also carries the risk of creating asset bubbles and financial instability if the injected liquidity is not properly managed. Additionally, quantitative easing may have limited impact if banks are reluctant to lend or if the economy is experiencing structural issues that cannot be solved by monetary policy alone.
| 5. How does quantitative easing differ from traditional monetary policy measures? | |
Ans. Quantitative easing differs from traditional monetary policy measures, such as adjusting interest rates, in its approach and objectives. While traditional measures focus on influencing short-term interest rates to manage inflation and economic growth, quantitative easing directly targets long-term interest rates and the money supply. It involves the central bank purchasing financial assets from the market, injecting liquidity, and stimulating lending and investment. This tool is typically used when traditional measures are ineffective or when interest rates are already low.
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Dec 22, 2024 Last updated |
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