So what is quantitative easing, well this is the main banks way of taking the money supply and increasing it. They do this by producing new money, by printing it and buying government securities, and this is how it works: an amount of money is decided and it is this that is used to buy government bonds which are in the market. So what this then does is sends the prices of the government bonds up and also reduces the amount of bonds, also their yields are lowered.

It then means that banks have a lot more money to lend to people as the bonds that they sold to the government enables them to do this. With lower yields on the bonds this also enables the banks to offer lower rates on lending and this enables them to keep being profitable. So when people see that lower rates are being offered this encourages businesses and consumers to borrow again and again. This creates activity when it comes to the credit market and economic activity is boosted.

When it comes to the impact of currency the more money that is supplied will encourage people to spend more and again the economy will be stimulated and become active. But even though this is a good thing it also has an adverse effect too. If there is an increase in the amount of money that is in circulation will end up resulting in the devaluation of the monies currency. This will then make services and goods increase and then inflation rises and this causes a concern. Now depending on the quantitative easing and the scale of it, rising prices can end up damaging the currencies value and the increase of activity in the economy will be undermined.

You can distinguish quantitative easing from the ordinary banking monetary policies and usually targets interest rates. Interest rates have been lowered to almost zero due to a low demand in money or deflation. It is when loans that are defaulted or non-performing, then lead to no further lending of money by banks. Then when recession or depression stops banks from lending any more money, a new set of tactics are implemented and this is what is called quantitative easing.