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Showing posts with the label what is quantitative easing?

What is quantitative easing?

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Quantitative easing is when a government pumps 'new' money directly into the economy. It  does this is by buying assets - usually financial assets such as government and corporate bonds.  The financial institutions selling those assets (e.g banks) can then boost the economy by lending this new money to businesses. Why is QE unusual? The normal way a government stimulates economic growth is by a) reducing the cost of borrowing  b) lowering taxes, particularly on business investment. The problem in the current financial crisis has been that interest rates are already at historic lows. As a result some governments (notably the US and to a lesser extent the UK) have attempted to inject money directly into the economy.  The European  Central Bank has resisted QE until recently. Some would argue that this has been a factor in the weakness of the European economic recovery English Language 100 FAQ Teaching Pack   -  only £1.99 using discount code  CQDWKF0

What is the difference between fiscal and monetary?

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When economists talk about fiscal policy they are referring to raising and spending taxes. Monetary policy is what central banks do to control the amount of money in an economy. Normally they do this either raising/lowering interest rates. Raising interest rates restricts the amount of money circulating and should reduce inflation. Lowering interest rates encourages expenditure as there is more money available. But as everyone know these are not 'normal' economic times. Interest rates in the advanced western economies have fallen to close to zero - but the recovery remains this. To counter this some central banks have introduced something called quantative easing .  Put simply means pushing more money directly into the economy via the banks - see here for more details.

What is a T-Bill?

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Treasury Bills are what the US government uses to borrow money. A T-Bill has always been seen as one of the safest forms of investment because it offers a guaranteed return - barring the complete collapse of the world financial system! WiseGeek   explains how it works: The smallest face value for a T -Bill is $1,000 US Dollars (USD). The T -Bill is sold at a discount, which is determined by the Bureau of Public Debt, but the Treasury pays the full face value when it is redeemed. For example, an investor might purchase a 90-day T -Bill for $900 USD, and earn a $100 USD return on the investment when the T -Bill is redeemed. Unlike many other securities, a T -Bill does not bear interest, but the return on a T -Bill is highly predictable and very stable.  T-Bonds have come to the fore recently as the US Treasury struggles to manage the financial crisis - see here