What is quantitative easing?

What is quantitative easing?

• A. A policy increasing tax rates to control inflation.
• B. A method of reducing the money supply.
• C. A monetary policy where a central bank buys securities.
• D. A strategy for increasing interest rates.

Answer: (C)

Quantitative easing is a monetary policy employed by central banks to stimulate the economy by increasing the money supply. This is achieved through the purchase of securities, such as government bonds and other financial assets, from the market. By buying these securities, the central bank injects liquidity into the financial system, making it easier for banks to lend money and for consumers and businesses to borrow. This, in turn, can help to lower interest rates and encourage spending and investment, which are critical for economic growth, especially during times of economic downturn or when conventional monetary policy (like lowering interest rates) has become less effective. The focus on purchasing securities distinguishes quantitative easing from other forms of monetary policy, as it directly affects the central bank's balance sheet and aims to impact long-term interest rates and financial conditions more broadly. This increased liquidity can help to foster a healthier economic environment by encouraging credit flow and supporting asset prices.

Quantitative easing is a monetary policy employed by central banks to stimulate the economy by increasing the money supply. This is achieved through the purchase of securities, such as government bonds and other financial assets, from the market. By buying these securities, the central bank injects liquidity into the financial system, making it easier for banks to lend money and for consumers and businesses to borrow. This, in turn, can help to lower interest rates and encourage spending and investment, which are critical for economic growth, especially during times of economic downturn or when conventional monetary policy (like lowering interest rates) has become less effective.

The focus on purchasing securities distinguishes quantitative easing from other forms of monetary policy, as it directly affects the central bank's balance sheet and aims to impact long-term interest rates and financial conditions more broadly. This increased liquidity can help to foster a healthier economic environment by encouraging credit flow and supporting asset prices.