Demand and Supply

There has been a fallacy or a wrong notion about economics, people feel that it is a tough subject and are not able to leverage from this subject. Economics is one such subject that once you are clear about its concept you can score well in any given day. The two words on which the subject’s foundation is built upon is DEMAND and SUPPLY and the rest revolves around this two.

UPSC questions are conceptual based and when you are sound with the concept the facts and figures are much easily remembered. So one can easily tackle with NPSC question which are very factual one should say. This column has been prepared meticulously keeping in mind of those readers who are new to this subject.

ARE YOU AWARE OF THE WORD QUANTITATIVE EASING!!

#what is QE?

Quantitative easing (QE) is an unconventional monetary policy used by central banks to stimulate the economy when standard monetary policy has become ineffective. A central bank implements quantitative easing by buying specified amounts of financial assets from commercial banks and other private institutions, thus increasing the monetary base (buying assets from the commercial banks and institution means release of more money to commercial banks this would eventually lower the interest rate up to the target thus allow flow of cheap money into the economy-to all industry and private player and give impetus to growth)

US, UK and euro zone used QE in order to revive from the aftermath of 2008 financial crisis (the biggest financial down fall after the famous 1930 great economic depression)

#why are the central banks giving off easy money?

e.g.- person “A” is unemployed so this will affect the economy of the whole family, so the father give soft loan or loan with zero interest to A in order to start up business and hence “A” become self employed thus the economy of the family is alleviated.

This is what the central bank of US, UK and EUROZONE central bank are doing ie buying assets of commercial bank to release money into the bank so that they will be able to lend more. The economic crisis was made much worse because the bank and other institutions were not able to lend money to the industries and private player( the industries always need money to keep up with the production- no growth without production, no employment if there is no production)

#why are we concern about this QE?

US economy has been releasing about 80billion through QE ,the private player receiving this easy money invest their surplus money to other country and especially to emerging economy like china and India because the returns are high. They invest this hot money into our stock market as FII (foreign institutional investors). This kind of investment has benefited India.

Recently there has been speculation about tapering of QE in US, so this speculation has made the exit of FII and also dragged the sensex down by 2000 points or about 10%. It is creating fear among other 3rd world country which has benefited from this. Though the US central bank has not announced withdrawal of QE but it is believed that it will be happening soon.

What are the possible questions from prelims point of view?

Q) Which of the following regarding QE is true?
a) It is a monetary policy announced by the government.
b) It was first used after 2008 economic crises.
c) It increase the liquidity in the bank
Ans: only c is true because QE as monetary policy is formulated by the central bank and not the government, it was first used by bank of Japan to tackle deflation, it increases the liquidity because it increase money base in the bank.

Also from mains point of view, questions won’t be asked directly but a clear concept about this new monetary instrument will help in knitting a good answer.

This article has been written based on information from The Hindu news paper, Wizard magazine, Jagran Josh web site.