Purpose and Effectiveness of the Expansionary Policy on Output, Unemployment, Interest rates, and Prices in the Short and Medium Run

Pages: 3 (1038 words) Published: March 15, 2013
Central Banks around the world have been carrying out expansionary policy (quantitative easing) through open market operations since the start of the financial crises.

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?

With the emergence of recent financial crisis, economies across the globe have been experiencing quite rough times and faced many difficulties, as well as downturns. Many countries faced the progressively increasing rate of unemployment, big declines in the share of the consumer’s wealth with a subsequent drop of the demand for goods and services. In an urgent necessity of improvement and recovery, governments were designing and implementing various combinations of fiscal and monetary policies, according to the situation on particular markets. Many of the Central Bank’s carried the expansionary policies (or so called quantitative easing) in order to speed up the revitalization of the financial market and speed up the economic growth. The quantitative easing is usually performed via one of the basic and very common monetary tool, - open market operations. In case of the expansionary monetary policy, it means that central banks e.g. Bank of England (UK) or The Federal Reserve (USA) are buying bonds and government securities with the purpose to increase the supply of money in the financial system and the economy. Such purchases of bonds are injecting money into the economy and stimulate its growth. However, as in any other economic tool there are cost and benefits for such policy. In further analysis there will be discussed and outlined the aspects of the purpose of the policy, efficiency dynamics and possible costs and risk of chosen economic policy.

Quantitative easing is often used in order to supply banks with an...
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