- February 7, 2022
- Posted by: OptimizeIAS Team
- Category: DPN Topics
Context- The government is prepared to deal with all kinds of risks that may arise out of global developments, US Federal Reserve’s decision to roll back monetary easing, said, Finance Minister Nirmala Sitharaman.
- Also known as Quantitative easing (QE) is a form of monetary policy used by central banks as a method of quickly increasing the domestic money supply and spurring economic activity.
- Quantitative easing usually involves a country’s central bank purchasing longer-term government bonds, as well as other types of assets, such as mortgage-backed securities (MBS).
- In response to the economic shutdown caused by the COVID-19 pandemic, on March 15, 2020, the U.S. Federal Reserve announced a quantitative easing plan of over $700 billion.1
- To execute quantitative easing, central banks increase the supply of money by buying government bonds and other securities.
- Increasing the supply of money lowers interest rates.
- When interest rates are lower, banks can lend with easier terms.
- Quantitative easing is typically implemented when interest rates are already near zero, because, at this point, central banks have fewer tools to influence economic growth.