Question

Why is QE a controversial monetary policy tool.

A. It may lead to excessive inflation.B. By artificially propping up asset prices, it benefits wealthy households the most. C. Households on a fixed income (e.g., retirees) are worse-off because historically low interest rates make it more difficult to live off of their savings. D. It creates a moral hazard problem as firms may be encouraged to take on riskier assets in the future feeling they would be "bailed-out" if anything goes wrong. E. All of the above.

Suppose China decides to sell the bulk of their relatively large holdings of U.S. Treasury bonds (currently, approximately $1.2 trillion). If you want to refinance your house (i.e., replacing your existing home loan with a new one) in the near future, how would China's action affect your choice to refinance?

A. You would want to refinance as soon as possible as interest rates should rise. B. You would want to wait to refinance as interest rates should rise. C. You would want to wait to refinance as interest rates should fall. D. China's actions should not affect your decision to refinance in any way. E. None of the above.

Answer 1

Hi there! As per our Honor Code, we only answer one question. Hence, we will answer the first one.

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Quantitative easing (QE) is a monetary policy in which central bank buys government securities or other assets to increase the supply of money and promote lending and investment.

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This monetary policy tool suffers from following limitations-

• Increase in money supply causes inflation.
• An abundance of money in the asset markets often creates bubbles. As people with higher wages and higher profits find their way into these markets, increasing the asset prices. Hence quantitative easing policy leads to the formation of an asset bubble in the market.
• The interest rate is the cost of money. Hence, any increase in the money supply reduces interest rates. People with fixed income tend to have a low level of savings. As a result, the low interest earned on savings reduces further, worsening the situation.
• Quantitative easing also creates a problem of moral hazard because companies may be encouraged to invest in riskier assets assuming that if anything goes wrong, they would be "bailed-out."

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All the above are reasons behind controversies of QE. Hence, option (E) is correct answer.