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CFA Level I · CFA Level I Exam · Monetary Policy

A central bank has cut its policy rate to zero and inflation remains well below target. It then buys long-dated government bonds from banks in large quantities, paying with newly created reserves. This action is best described as:

This is quantitative easing. When the policy rate is at zero, the central bank buys long-term bonds with newly created reserves to expand its balance sheet and lower longer-term yields. Forward guidance only communicates intentions, and a peg targets the exchange rate.

  1. Aquantitative easingCorrect
  2. Ba currency peg
  3. Cforward guidance

Explanation

Large-scale purchases of long-term securities financed by creating bank reserves is quantitative easing. Forward guidance only communicates the expected future path of rates and involves no asset purchases. A currency peg fixes the exchange rate and is a different policy.

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