explain the channels through which quantative easing affect

explain the channels through which quantative easing affect aggregate demand?

Solution

Due to quantitative easing money supply increases in economy. Given the demand for money this means interest rates will fall. It happens because cost of borrowing money by banks in interbank market falls due to availability of sufficient funds.The banks in turn decrease interest rates that they charge to people. This leds to greater demand for goods by consumers and greater investment as cost of finance falls. Hence aggregate demand increases. Other channel is that people find their purchasing power has increased as a result of higher money supply. Thus they demand more goods. Another channel is that due to quantitative easing reserve requirements ration may be decreased by central bank. This leds to multiple expansion of credit. As a result demand increases