What is quantitative easing?

What is quantitative easing?

• A. A strategy to increase tax rates to control inflation
• B. A monetary policy to stimulate the economy through asset purchases
• C. A method for reducing government spending
• D. A technique for increasing reserve requirements for banks

Answer: (B)

Quantitative easing is a monetary policy tool used primarily by central banks to stimulate the economy when traditional monetary policy becomes ineffective, particularly during a period of low interest rates. This approach involves the central bank purchasing a large amount of financial assets, usually government bonds and mortgage-backed securities, from the market. By doing so, it injects liquidity directly into the financial system, aiming to lower interest rates, increase money supply, and promote lending and investment. The goal of quantitative easing is to boost economic activity during challenging economic times, such as during a recession or when inflation is very low. By making money more accessible and inexpensive, it encourages borrowing and spending by both businesses and consumers, which can lead to economic growth. In contrast, the other options describe different fiscal and monetary strategies that do not align with the primary aim and mechanism of quantitative easing. For instance, increasing tax rates is more focused on controlling inflation through fiscal measures, while reducing government spending pertains to fiscal policy rather than monetary. Similarly, increasing reserve requirements for banks is a form of contractionary monetary policy that restricts lending and does not stimulate economic activity, which is contrary to the goals of quantitative easing.

Quantitative easing is a monetary policy tool used primarily by central banks to stimulate the economy when traditional monetary policy becomes ineffective, particularly during a period of low interest rates. This approach involves the central bank purchasing a large amount of financial assets, usually government bonds and mortgage-backed securities, from the market. By doing so, it injects liquidity directly into the financial system, aiming to lower interest rates, increase money supply, and promote lending and investment.

The goal of quantitative easing is to boost economic activity during challenging economic times, such as during a recession or when inflation is very low. By making money more accessible and inexpensive, it encourages borrowing and spending by both businesses and consumers, which can lead to economic growth.

In contrast, the other options describe different fiscal and monetary strategies that do not align with the primary aim and mechanism of quantitative easing. For instance, increasing tax rates is more focused on controlling inflation through fiscal measures, while reducing government spending pertains to fiscal policy rather than monetary. Similarly, increasing reserve requirements for banks is a form of contractionary monetary policy that restricts lending and does not stimulate economic activity, which is contrary to the goals of quantitative easing.