The economy of the United States is undergoing a major financial crisis situation. The government has attempted to control the situation by adopting two policy measures. The first approach of situation control is introduction of fiscal policy measure of increased government spending to boost demand. The second approach to situation control is adoption of monetary policy measure of reducing Fed interest rates. However, both these measure have been inadequate as in spite of large relief package and near zero Fed nominal interest rate, government has been unable to boost growth.
Quantitative easing is a new monetary policy approach being used by the fed bank to enhance growth. It works on the concept of injecting additional money into the economy. This is done by purchasing government bonds or other credible financial asset from banks with new money. The Fed is the central bank and has the authority to mint money. This increases money supply in the economy. The benefit of this policy is that it is applicable in extreme crisis situations when nominal Fed interest rates are near zero and government spending is not boosting demand.
The adoption of quantitative easing measures entails a few costs. It is a new and evolving concept, and its effectiveness it yet to be tested. According to Davidson and Blumberg, it is still a controversial issue and it did not show the greatest of results in Japan, where it was first adopted. Thus, people’s money collected through taxes is at great risk. The flooding of money into the economy had caused the Treasury bill to yield less than a per cent (Hudson 82). Thus, it is important to evaluate both benefits and limitations of this unconventional policy before implementing it on large scale.
Works Cited
Davidson, Adam and Blumberg, Alex. “Quantitative Easing, Explained”. Npr.org, 7 Oct. 2010. Web. 30 May 2012.
Hudson, Michael. “U.S. ‘quantitative easing’ is fracturing the Global Economy”. Real World Economic Review 55 (2010): 82-93. Web. 30 May 2012.
