Tuesday, March 24, 2009

Key Concept - Quantitative Easing

Quantitative easing is basically a term for "printing money". It refers to a central bank essentially creating new money and using it to reduce interest rates and thus encourage lending. It can accomplish this "easing" by: buying debt in the form of government bonds, buying assets from banks, directly lending to deposit-taking institutions, or any combination thereof.

Central banks normally use interest rate cuts to stimulate lending. Quantitative easing can be used when this strategy is not working or interest rates have already been cut to 0%. It can be used to combat deflation, but if the money supply is increased too much, it can create inflationary pressures. The ultimate risk is hyperinflation.

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