It is the process of raising the supply of money by printingmoney and buying securities of the government by the Central Bank. The procedure works as mentioned below:
1. Central Bank makes a pre-determined quantity of money and utilizes it to purchase the bonds of government in a market.
2. As this lessens the government bonds supply, their prices increases. This signifies that the yields are lessened.
3. Banks that sell the bonds to a government have large amount of money for lending. Additionally, as the yields on the bonds are lower, the banks can lower the rates of lending and makes profit. Lower rate of lending encourages customers and business for borrowing. This division activityin a credit market boosts the activity of the economy.
Impact on the currency: The high supply of money encourages spending and therefore stimulates activity of the economy. On the other hand, a raise in the quantity of financein circulation affects the devaluation of money. Costs of services increases, giving a rise in the concerns related to inflation. Based on the quantitative easing, rise in costs could corrode the currency value and weaken the raise in activity of the economy.