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On the 3rd of November the Federal Reserve Bank in the US announced its second round of quantitative easing (QE). The Fed said it will buy $600 billion of Treasuries between now and next June, at about $75 billion a month.
Explain the purpose of this policy and discuss potential risks associated with it. Describe the impact on output, unemployment, interest rates and prices in the short and medium run. How effective do you expect this policy to be and what factors does its efficacy depend on?
GUIDANCE:
- There is a whole lot of materials available online in the form of articles (see, for example, The Economist, Financial Times, BBC news), blog posts of famous economists (such as Paul Krugman, Gregory Mankiw, David Andolfatto), etc, on this topic.
Some of the opinions expressed in these articles criticize the policy, while others support it. You can consult any of these sources for your answer and you can agree or disagree with them; however, you must justify your answer using the macroeconomic tools we have learned so far. That is, in constructing your argument you should clearly explain what economic models you base your answer on, what the assumptions of those models are and whether they are likely to be true, and what predictions these models have related to the question above. You can use standard textbook diagrams, data series graphs or other materials you find to illustrate your point.
- To help you structure your thoughts, these are a few things you may want to address when answering this question: a difference between demand and supply shocks, the short-run and medium-run effects of the monetary policy, the liquidity trap, a role of expectations and credibility of the Fed's policy.