FRM Part II · FRM Exam Part II · Monetary and Fiscal Policy: Safeguarding Stability and Trust
A central bank buys long-dated government bonds from the market and pays for them by creating bank reserves, with the aim of lowering long-term yields once its policy rate is near zero. Which term describes this policy?
This is quantitative easing: the central bank buys long-dated government bonds with newly created reserves to push down long-term yields when the policy rate is near zero. Forward guidance only communicates the expected path of rates and involves no asset purchases.
- AQuantitative easingCorrect
- BForward guidance
- CYield curve steepening through reserve requirements
- DSterilised foreign exchange intervention
Explanation
Large-scale purchases of long-dated securities financed by newly created reserves are quantitative easing. Forward guidance is communication about the future policy path and involves no asset purchases. Sterilised FX intervention concerns exchange rates, not long-term yields.
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