Quantitative easing involves which action?

Quantitative easing involves which action?

• A. The central bank increases interest rates to slow inflation
• B. The central bank reduces reserve requirements
• C. The central bank creates money to buy government bonds
• D. The central bank imposes higher taxes on bonds

Answer: (C)

Quantitative easing is the central bank creating new money to buy government bonds, which expands the monetary base and bank reserves. This process tends to push up bond prices and lower long-term interest rates, encouraging lending and spending when conventional policy tools are already at or near their limits. The action described—creating money to purchase government bonds—matches QE precisely and explains why it is used to stimulate the economy. Raising interest rates would slow inflation and cool spending, not stimulate it. Reducing reserve requirements is another way to expand money supply but QE specifically centers on asset purchases funded by new money. Imposing higher taxes on bonds is a fiscal measure, not monetary easing.

Quantitative easing is the central bank creating new money to buy government bonds, which expands the monetary base and bank reserves. This process tends to push up bond prices and lower long-term interest rates, encouraging lending and spending when conventional policy tools are already at or near their limits. The action described—creating money to purchase government bonds—matches QE precisely and explains why it is used to stimulate the economy. Raising interest rates would slow inflation and cool spending, not stimulate it. Reducing reserve requirements is another way to expand money supply but QE specifically centers on asset purchases funded by new money. Imposing higher taxes on bonds is a fiscal measure, not monetary easing.