Quantitative easing – increasing the money supply

It appears thee Federal Reserve may try to stimulate the U.S. economy with what is being called quantitative easing. (Here is a report on this.)

To do this the fed would purchase Treasury securities rather than letting them be sold to the public.  This is how central banks try to increase the money supply in the hope it will bring interest rates down.  The money paid for these securities is called high powered money because it is subject to a multiplier effect as bankers use it to make loans.

It will be interesting to see if and how this works.   It depends upon bankers being willing to make more loans and it will depend upon the ability of the economy to increase the output of goods and services.   There is a danger increasing the money supply will only increase inflation.

 

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