ACCA Applied Knowledge · Business and Technology · Macroeconomic factors
A central bank buys government bonds from commercial banks in the open market, paying with newly created reserves. This is known as quantitative easing. What is the intended effect?
Quantitative easing aims to increase the money supply and push down long-term interest rates. The central bank buys bonds with newly created money, raising bond prices and lowering yields, which encourages banks to lend and firms and households to borrow and spend.
- ATo increase the money supply and lower long-term interest ratesCorrect
- BTo reduce the money supply and raise short-term interest rates
- CTo reduce the government's budget deficit directly
Explanation
Buying bonds injects reserves into the banking system and raises bond prices, which lowers yields (long-term rates). The aim is to encourage lending and spending. Selling bonds would do the opposite, and QE does not directly reduce the budget deficit.
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