ACCA Applied Knowledge · Business and Technology · Macroeconomic factors
A government's central bank buys large quantities of government bonds from commercial banks in exchange for newly created reserves, in order to stimulate a weak economy. What is this policy known as?
This is quantitative easing. The central bank creates new money to buy government bonds from banks, increasing liquidity and lowering long-term interest rates so that lending and spending are encouraged. The other terms describe fiscal or structural policies, not central bank asset purchases.
- AQuantitative easingCorrect
- BFiscal consolidation
- CImport substitution
- DPrivatisation
Explanation
Quantitative easing involves the central bank creating money to buy bonds, raising bond prices, lowering long-term yields and increasing bank liquidity to encourage lending. Fiscal consolidation is deficit reduction by government. Import substitution and privatisation are unrelated to central bank money creation.
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