Date of Graduation

5-2012

Document Type

Thesis

Degree Name

Bachelor of Science in Business Administration

Degree Level

Undergraduate

Department

Finance

Advisor

Craig Rennie

Abstract

The purpose of this thesis is to examine the current and potential impact of the Federal Reserve’s non-traditional monetary policy known as Quantitative Easing on inflation in the United States. It examines the events and rationale behind the Federal Reserve’s policy actions as well as the theoretical implications for inflation. However, theory and reality do not seem to coincide. The Consumer Price Index (CPI) has shown no correlation to what many refer to as the “printing of money” that has occurred during Quantitative Easing. This is in opposition to the basic economic principle of the Quantity Theory of Money which in its most basic form states that “more money chasing the same amount of good will lead to increased price levels.” Upon further examination of where the dollars that have been used to purchase treasuries, mortgage backed securities, and other agency debt by the Federal Reserve this thesis finds that the reason for such low inflation statistics is that the money is tied up in the excess reserves of depository institutions. Excess reserve balances of financial institutions now sit at a historical high and if these reserves were to drain into the economy, the inflationary impact could be quite substantial.

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