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IAI Actuarial Core Principles · Business Economics · Recent macroeconomic history

During the COVID-19 pandemic, many governments and central banks introduced large fiscal support and quantitative easing. Which of the following is the best description of quantitative easing?

Quantitative easing is the central bank creating reserves to buy assets such as government bonds. This lowers long-term yields and eases financial conditions when policy rates are already very low, as used during the pandemic.

  1. AThe central bank creates reserves to buy financial assets, such as government bonds, to lower long-term yields and support liquidityCorrect
  2. BThe government raises income tax rates to reduce its budget deficit
  3. CThe central bank sells bonds to withdraw money from the banking system
  4. DThe government fixes the exchange rate against a foreign currency
  5. The central bank prohibits banks from lending to households

Explanation

Quantitative easing is an unconventional monetary policy used when policy rates are near their floor. The central bank buys assets with newly created reserves, pushing up asset prices, lowering long-term yields and easing financial conditions. Selling bonds describes tightening.

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