RAS question
The term 'helicopter drop' of money differs from Quantitative Easing because:
Correct answer: (A) Helicopter money directly finances government spending, while QE buys financial assets.
Helicopter money directly finances government spending through fiscal monetisation, whereas quantitative easing works through central-bank purchases of financial assets.
Explanation
The distinction is about the route by which new central-bank money enters the economy. In quantitative easing, the central bank buys assets, mainly government debt and sometimes other assets, to ease financial conditions; such bond purchases are made in the secondary market and can be reversed. Helicopter money is the more direct and fiscally linked option: the Independent Evaluation Office of the International Monetary Fund describes it as central-bank balance-sheet expansion through direct lending to the government to finance additional public spending. That makes it a permanent injection of money. It can be more potent, but the same reason makes it riskier: it raises inflation risk and can threaten central-bank independence by blurring the line between monetary policy and fiscal financing.
Why the other options are wrong
- (B) QE is not the more inflationary option; helicopter money is more potent and carries the higher inflation risk because it is direct fiscal monetisation.
- (C) They are not the same mechanism: QE uses asset purchases, while helicopter money involves direct financing of government spending.
- (D) Helicopter money does not reduce the money supply; it is a permanent injection of money.
Concept
This tests unconventional monetary policy and the boundary between monetary policy and fiscal financing. It recurs in RAS because inflation, central-bank independence and public-debt financing are standard Indian Economy themes.