Macreoconomis

Macreoconomis

Running head: QUANTITATIVE EASING 1, 2, 3








Quantitative Easing 1, 2, 3








Author Note
This paper was prepared for Macroeconomics 105 118, taught by Professor George Gregory
Abstract
How does quantitative easing work? The Fed adds credit to the banks' reserve accounts in exchange for MBS (mortgage-backed securities) and Treasuries. The reserve account is the amount that banks must have on hand each night when they close their books. The Fed requires that around 10% of bank deposits be held either in cash in the banks' vaults or at the local Federal Reserve Bank. When the Fed adds credit, the banks have more than they need in reserves. They now have more to lend to other banks. As banks try to unload their extra reserves, they drop the interest rate they charge. This is known as the Fed funds rate. The purpose of this expansionary monetary policy is to lower interest rates and spur economic growth.

Quantitative Easing 1, 2, 3
QE increases the money supply because lower interest rates allow banks to make more loans. Bank loans stimulate demand by giving businesses more money to expand, and shoppers more credit to buy things with. By increasing the money supply, QE keeps the value of the dollar low. This made U.S. stocks seem like a relatively good investment to foreign investors, and made U.S. exports relatively cheaper.
Quantitative Easing 1 (December 2008 - June 2010)
QE1 is the nickname given to the Federal Reserve's initial round of quantitative easing. That's when the Fed purchases debt, such as mortgage-backed securities (MBS), consumer loans and Treasury bills, bonds and notes. QE1 was launched on November 26, 2008, when Fed Chairman Ben Bernanke announced an aggressive attack on the financial crisis of 2008. The Fed began buying $600 billion in MBS, and $100 billion in other debt, all of which were backed by Fannie Mae, Freddie Mac, Ginnie Mae and the Federal Home Loan Banks. The purpose was to support the...