Quantitative easing is a monetary policy tool used by the Federal Reserve to depress interest rates primarily through:

Quantitative easing is a monetary policy tool used by the Federal Reserve to depress interest rates primarily through:

• A. Purchase of securities from the market and flooding financial institutions with money
• B. Tightening credit by raising reserve requirements
• C. Selling government bonds to drain liquidity
• D. Reducing the money supply

Answer: (A)

The mechanism being tested is expanding liquidity to push down borrowing costs. Quantitative easing lowers interest rates by the Fed buying longer-term securities from the market and crediting banks with new reserves. This injection of money increases the monetary base, raises demand for safe assets, and pushes up bond prices with yields falling. The result is cheaper borrowing for households and businesses and steadier financial conditions. The other actions described would do the opposite: raising reserve requirements tightens credit; selling government bonds drains liquidity; reducing the money supply contracts liquidity.

The mechanism being tested is expanding liquidity to push down borrowing costs. Quantitative easing lowers interest rates by the Fed buying longer-term securities from the market and crediting banks with new reserves. This injection of money increases the monetary base, raises demand for safe assets, and pushes up bond prices with yields falling. The result is cheaper borrowing for households and businesses and steadier financial conditions.

The other actions described would do the opposite: raising reserve requirements tightens credit; selling government bonds drains liquidity; reducing the money supply contracts liquidity.