What is quantitative easing (QE) and how does it work?

What is quantitative easing (QE) and how does it work?

• A. Large-scale asset purchases by the central bank to lower long-term rates and provide liquidity, expanding the balance sheet.
• B. Selling government bonds to shrink the balance sheet.
• C. Increasing reserve requirements to tighten credit.
• D. Setting a new target for the exchange rate.

Answer: (A)

Quantitative easing is the central bank’s program of buying large amounts of long-term assets to push down long-term interest rates and add liquidity to financial markets. By purchasing securities from banks and other holders, the central bank creates new reserves, increasing its balance sheet. Those higher reserves and the increased demand for long-term assets reduce long-term yields, encourage borrowing and investment, raise asset prices, and help stimulate spending when standard policy rates are already very low. It also signals a commitment to easy financial conditions for an extended period. This approach is not about shrinking the balance sheet by selling assets, nor about tightening credit through higher reserve requirements, and it isn’t about setting an exchange-rate target—that’s a separate foreign‑exchange policy tool.

Quantitative easing is the central bank’s program of buying large amounts of long-term assets to push down long-term interest rates and add liquidity to financial markets. By purchasing securities from banks and other holders, the central bank creates new reserves, increasing its balance sheet. Those higher reserves and the increased demand for long-term assets reduce long-term yields, encourage borrowing and investment, raise asset prices, and help stimulate spending when standard policy rates are already very low. It also signals a commitment to easy financial conditions for an extended period.

This approach is not about shrinking the balance sheet by selling assets, nor about tightening credit through higher reserve requirements, and it isn’t about setting an exchange-rate target—that’s a separate foreign‑exchange policy tool.