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Chapter 15 Monetary Policy (PowerPoint)

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Chapter 15 Monetary Policy (PowerPoint) Powered By Docstoc
					Prepared by Sayed Hossain
May 6, 2011

Personal website : www.sayedhossain.com

www.sayedhossain.com
1.Explain what is meant by Quantitative
Easing and how it is done by the Fed.

2.Explain why QE is similar to conventional
(Traditional) monetary policy and also very
different.

3. Compare the arguments in favor of
completing QE2 with the arguments to end
QE2.
Traditional Monetary Policy
                                                     Sm
                       10
                                                              Money supply is
    Rate of interest                                          decreased from $200
                       7.5                                    billion, to $150 billion
                                                              by FED.
                        5                            ie

                       2.5                                     Dm

                        0
                             0   50   100   150   200 250 300
                                       Money demanded
                                      (billions of dollars)
Traditional Monetary Policy
                                           Sm1      Sm
                      10                                     A temporary shortage
   Rate of interest                                          of money. Interest rate
                      7.5                                    hikes to 7.5 percent in
                                                             money market

                       5                            ie

                      2.5                                     Dm

                       0
                            0   50   100   150   200 250 300
                                      Money demanded
                                     (billions of dollars)
Traditional Monetary Policy
                                                  Sm
                    10
                                                           The money supply is
                                                           increased from $200
 Rate of interest
                    7.5
                                                           billion,to $250 billion by
                                                           FED.
                     5                            ie

                    2.5                                      Dm

                     0
                          0   50   100   150   200 250 300
                                    Money demanded
                                   (billions of dollars)
Traditional Monetary Policy
                                                    Sm Sm2
                      10                                     A temporary surplus
   Rate of interest                                          of money. Interest
                      7.5                                    rate is reduced
                                                             from 5 to 2.5
                                                             percent.
                       5                            ie

                      2.5                                    Dm

                       0
                            0   50   100   150   200 250 300
                                      Money demanded
                                     (billions of dollars)
Traditional Monetary Policy and
Quantitative Easing (QE2)

The targets of both the Traditional
Monetary Policy and Quantitative Easing
(QE2) are to increase Money Supply and
boost Spending.
Traditional Monetary Policy and
Quantitative Easing (QE2)

Traditional monetary policy targets Fed
Fund Rate while QE2 is targeting Quantity
of Money.
Traditional Monetary Policy and
Quantitative Easing (QE2)

The Fed Fund Rate is a target to control
Short Run Rate while QE2 is targeting
Long Run Rate to enhance Spending.
Traditional Monetary Policy and
Quantitative Easing (QE2)

Traditional monetary policy is generally
implemented by purchasing Short Term
Bond while QE2 is implemented by buying
Long Term Bond to control Long Run Cost
of Borrowing
Why Quantitative Easing (QE2) ?

As Fed Fund Rate has gone down to
Almost Zero Percent but fails to bring
fruitful results, FED has targeted Long
Run Rate under QE2 Program to enhance
Spending.
Why Quantitative Easing (QE2) ?

FED has targeted to Buy almost $900
billion Securities (with newly created
money) from Market to increase Quantity
of Money.
NEGATIVE IMPACTS OF QE2
NEGATIVE IMPACTS OF QE2

1. Prices of commodities, oil etc have gone
up. Meaning that Inflation is escalating
which is a Hidden Tax.

As a result, living standard is eroding.
NEGATIVE IMPACTS OF QE2

2.Value of dollar is depreciating meaning
that US Assets will be less lucrative.

As a result, the Capital/Financial Account
Balance of the United States will be
Squeezed.
NEGATIVE IMPACTS OF QE2

3. As the dollar is depreciation steadily, the
Confidence on US currency is eroding.

So, demand for gold and silver is
increasing and hence the prices of gold and
silver.
NEGATIVE IMPACTS OF QE2

4. US Credit Rating is declining meaning
that US government will have to pay
Higher Rates on its Bond.

Hence, deficit will be Increased further.
Hence, Debt.
.
POSITIVE IMPACTS OF QE2
POSITIVE IMPACTS OF QE2

1.Rate of Unemployment Dropped to 8.8
percent (March) but again Increased to 9
percent (April).
POSITIVE IMPACTS OF QE2

2. The risk of deflation has been tackled.
POSITIVE IMPACTS OF QE2

3. Stock prices have Increased, meaning
that households’ wealth have gone up.

Spending is likely to go up.
POSITIVE IMPACTS OF QE2

4.Value of dollar is depreciating meaning
that US exports will be increasing while
imports will decline.

As a result, the Current Account Balance
of the United States will be Healthy.
POSITIVE IMPACTS OF QE2

5.Although inflation is registered at 2.7 percent
(March), slightly higher than Target 2 percent.
It is still manageable.

6. GDP growth rate is Still Positive registered
at 1.8 percent in the first quarter of 2011.
Whether QE3 is desirable ?

I can comment on it after June 2011
when the QE2 would be ended by FED.
End

				
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