Extended Essays 2021

Quantitative easing and lower interest rates are other monetary policies that both the two

economic crises used. It efficiently lowers the borrowing costs and encourages consumers

and firms to borrow and buy commodities that help stimulate economic activity.

Consumption (C) and Investment (I), as two important components of AD, refers to the total

spending by consumers on domestic goods and services. Therefore, while quantitative easing

policy lowers firms ’ production cost and increases the income for both individuals and firms,

households and firms will gain capital and be willing to purchase for investment programs

and buy commodities, which will lead to an increase in consumption and investment.

Therefore, it increases the real GDP and promotes it back to the previous average level.

However, although the government has stopped releasing funds and reducing interest rates as

soon as possible according to the forecast data, they are still in effect, increasing aggregate

supply as shown in Diagram 3, resulting in deadweight loss. Eventually, an extremely high

inflation rate compares to the inflation rate before the pandemic, which can be directly seen

in Table 2. By March 2021, the inflation rate in the United States will be back to the previous

9