S-LM model and Quantitative Easing

Quantitative Easing (QE) is one of the unconventional monetary policy tools used by policy makers in recent years. QE implies that central banks purchase a broader set of financial assets, e.g. government bonds, corporate bonds and mortgages, from distressed commercial banks and large private institutions to facilitate the flow of credit in the financial markets.

1. a)Explain why QE became necessary after the Covid-19 shock.
2. b)QE can have two desired effects: It can lower the risk premium and it can increase inflation (because the central bank increases money supply). For each of these two, explain in words

how they may stimulate the economy. Show the effects graphically in one single IS-LM diagram. Why is it important to consider the zero lower bound?