When interest rates are near zero and traditional monetary policy is ineffective, the Fed or other central bank may resort to a strategy referred to as quantitative easing. What does this strategy involve?
A) allowing interest rates to rise slowly by providing substantial reserves for as long as is necessary to avoid inflation
B) reducing the money supply to raise the interest rates slowly without discouraging spending
C) keeping interest rates very low by providing substantial reserves for as long as is necessary to avoid deflation and encourage spending
D) increasing the money supply and interest rates at a constant rate to stimulate economic activity

Question

Quizplus · Accepted Answer

Quantitative easing involves keeping interest rates very low by providing substantial reserves for as long as is necessary to avoid deflation and encourage spending. In this strategy, the central bank buys large quantities of government bonds or other securities from banks and other financial institutions, thereby increasing the money supply and lowering long-term interest rates. This is done to stimulate economic activity and prevent deflation.

When Interest Rates Are near Zero and Traditional Monetary Policy