The Fed, a.k.a. the Federal Reserve, is more about easing the money supply...rather than ripping the bandaid off. Quantitative easing is when a central bank, like the Fed, increases the money supply by buying government securities back from the market.
Quantitative Easing, or QE, is considered a kind of last resort in the U.S. You’ll likely only find the Fed pulling the QE wrench out of their monetary policy toolkit if interest rates are already at zero (or near zero). Once interest rates are down as far as they can go, there’s nothing else the Fed can do with interest rates to encourage investing and spending. They’ve made borrowing cheaper...and, yep. That’s about it. And they hope that will result in more people borrowing, which should stimulate the overall economy (employment, spending, all of it).
If the economy is still looking pretty recessionary after pushing interest rates down to zero, then the Fed will do QE. In other countries, QE is a tool the central banks use more often than in the U.S. Like in Japan.
We saw the Fed executing quantitative easing during the Great Recession of 2008. The subprime mortgage crisis took down the entire economy with it, leading to super-low interest rates and QE. Pulling out all the stops.
The reason we should “ease” the money rather than lump-sum it is because increasing the money supply decreases the value of each dollar. That means: inflation nation. Hyperinflation is one of the worst scenarios, where prices climb at an alarming rate, and people stop trusting fiat currency.
The other worst scenario: stagflation. That’s when the central bank has pulled out all the stops to get the economy going again, we’ve got inflation, and yet GDP is still going down. It’s all about...easing into it.
Related or Semi-related Video
Econ: What are Price and Quantity Contro...3 Views
and finance Allah shmoop what our price and quantity controls
All right people while the invisible hand does a lot
of good bringing consumer demand to producer supply at equilibrium
But sometimes the invisible hand can't work its magic For
instance in cases of monopoly on Olonga pally firms are
incentivized to produce less quantity at higher prices you know
than they would if they had some competition Well in
cases like these the government can step in to try
to correct the market making it more efficient by setting
price and quantity controls In other cases the government may
set price and quantity controls in response to social issues
and actually creating market distortion rather than a correcting one
So how do price and quantity controls work If you
look at your typical supply and demand graph like this
take a look at the axes on the X axis
We've got quantity on the Y axis We've got price
Since the X axis and a Y axis are price
and quantity on the graph well those are the two
things the government has to play with to affect the
markets No excess demand or supply means we're at equilibrium
where supply and demand cross like right there This means
the supply a good or service is sold at matches
the same supply demand it all for an agreed upon
price by buyers and sellers What market inefficiencies produce what's
called a dead weight loss which we can see on
the graph right there representing the cost of inefficiency When
there's either excess supply or excess demand while we Khun
see dead weight loss the larger the deadweight loss triangle
on the graph while the farther away from equilibrium The
market is when there's excess demand That means there's a
shortage of supply when lots of people want a limited
quantity of stuff while prices skyrocket On the flip side
when there's excess supply demand shrinks When there's an abundance
of something compared to you know how much of it
people want Well prices fall sometimes Government price in quantity
controls are designed to reduce deadweight loss and other times
these controls create deadweight loss First up price controls A
government can set a price control basically setting price limitations
on firms in a certain market Well there's two main
types of price controls Price ceilings and price floors Well
price ceilings mean there's an upper limit on how much
affirm Khun Selig odor service for For instance a government
might set a price ceiling on something that everyone needs
to keep you know affordable like food for natural monopolies
that affect a lot of society like utilities Internet service
providers and buses that buses Will governments oftentimes set a
price ceiling Will these air all natural monopolies since their
monopolies that happened spontaneously from very high fixed startup costs
Price ceilings on natural monopolies like these insure businesses aren't
taking too much advantage of their monopoly status and overcharging
consumers on those evil business is rent controlled areas are
another example of price ceilings However rent controlled areas are
more likely creating a dead weight loss Ten Getting rid
of one but artificially lowering the cost of housing that
creates excess demand Rent control Lower supply to since that
means landlords and rent controlled areas will be feeling the
squeeze of the price ceiling Why be a landlord in
an area where prices are kept artificially low Hello rent
control when you could be a landlord in an unregulated
red state area with much higher rent prices in therefore
profits These landlords and rent controlled areas who are making
less money because of government intervention are then incentivized to
provide housing with you know worst quality Another reason government
might set a price ceiling is to prevent hyper inflation
which history has told us happens often during war time
Right Well price floors are the opposite you know when
a government sets a lower bound on price for firms
While price ceilings often help consumers price floors often help
producers For instance governments sometimes help farmers out by setting
price floors on things like milk By setting the price
artificially high though this can create reduced a man and
excess supply usually does well In the case of farmers
governments usually set price floors along with the promise of
buying up any excess supply from farmers Well why does
the government bother helping out these farmers and keeping him
around Technology made farming go from meeting a ton of
people needing very few people for the same output of
food producing on mass farming equipment fancy fertilizers and pesticides
Ball radically transformed the farming industry Some governments have used
price floor simply to reduce consumer demand for a good
for instance making alcohol or tobacco more expensive would ideally
drive demand for alcohol and tobacco down well in the
labor market Minimum wages a price floor Here the suppliers
are workers not the firms Firms are demanding labor and
workers are supplying it to remember when the price of
something rises It's usually followed by a drop in demand
Okay so what about quantity controls Well a quantity control
is usually referred to as a quota and it limits
the quantity of a good quotas work well in cases
when controlling the quantity is easier or more important than
controlling the cost For instance a government may set a
quota for nuclear power plants since there's a potentially high
social cost If you know something went awry and the
international markets it's common for countries to set import quotas
So this quota restricts a supply of a certain good
from international markets so that gives the domestic country a
leg up against them Foreign competitors like another example of
quota on imported steel would mean that domestic steel firms
would get an advantage over imported steel while international quotas
benefits some domestic firms This comes at the cost of
everyone buying the goods meaning a steel quota in the
US would mean higher steel prices from domestic steel producers
then from cheaper foreign producers in an unregulated market A
limited number of hunting and fishing licenses and tags are
another example of quotas in order to keep hunting and
fishing populations you know in existence the young ones have
to be given time to be born grow up and
reproduce right Well oftentimes A combination of quotas and price
floors in the form of high price licenses and tags
are used to keep hunted and fished populations at sustainable
levels Setting a quota a quantity limit has similar effects
as a price floor Artificially restricting quantity sold means higher
prices and lower demand compared to free market equilibrium Well
if you were wondering it's not too common when a
capitalistic government sets a quantity minimum or floor But if
they did in theory it'd create a surplus of supply
compared to equilibrium levels and potentially would need to be
supported by the government like price floors on agriculture to
make up for the lack of demand Well for instance
let's say in the future the government created an enforceable
law on the labor market making firms hire a minimum
number of people in response to shrinking jobs Yes Hello
Robots They're coming for our jobs Firms would then be
forced to hire people when they wouldn't want or need
thio creating forced oversupply of workers on two firms Well
all this government regulation can breathe rebellion rebellion in the
form of the underground economy the market free of any
government regulations And yes black market milk is a thing 00:07:15.992 --> [endTime] just like black market booze Hey
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