In 2009 the Fed initiated a program called QE or quantitative easing to try and stimulate the economy. What effect would this have on the Aggregate supply and demand curves? Also what effect would it have on GDP and Price Level?

Question

In 2009 the Fed initiated a program called QE or quantitative easing to try and stimulate the economy.  What effect would this have on the Aggregate supply and demand curves?  Also what effect would it have on GDP and Price Level?

anonymous · Answer

Quantitative easing is when a county's central bank buys financial assets. The aim being is the encourage liquidity within the banks to encourage them to lend more. Lending funds consumer spending as people have more money to purchase goods and services with. This causes aggregate demand to rise as consumer spending is a part of it thus output increases  so GDP increases. It also causing long run aggregate supply as loans to firms are less costly thus encouraging investment. If LRAS increases then the price level will fall as output increases along with GDP increasing.