What is 'quantitative easing' in economic policy?

Quantitative easing is a monetary policy implemented by central banks to stimulate the economy, particularly during periods of low inflation and economic stagnation. This policy involves the purchase of financial assets, such as government securities and other securities, from banks and financial institutions. By buying these assets, the central bank injects liquidity into the financial system, which increases the overall money supply.

The primary goal of quantitative easing is to lower interest rates and encourage lending and investment by making it cheaper for banks to borrow money. When banks have more reserves due to the central bank's purchases, they can offer more loans to businesses and consumers, which can help spur economic activity. Additionally, by increasing the money supply, the central bank aims to promote inflation to reach its target levels and support economic growth.

In contrast, the other options present different economic strategies: reducing tax rates stimulates economic demand through fiscal policy, cutting government spending aims to reduce budget deficits, and increasing revenue through bond issuance reflects traditional government financing methods. These approaches do not involve the central bank's direct intervention in the bond market to influence the money supply, which is the hallmark of quantitative easing.