Question 67

Quantitative easing refers to an expansion of the Federal Reserve's balance sheet by purchasing assets.

Quantitative easing is a monetary policy used by central banks to stimulate the economy by increasing the money supply, primarily through the purchase of assets such as government securities. This action directly expands the balance sheet of the Federal Reserve.

A) An expansion of the Federal Reserve's balance sheet by purchasing assets

This option is correct because quantitative easing specifically involves the central bank buying financial assets to inject liquidity into the economy, thereby increasing the monetary base and encouraging lending and investment.

B) A gradual but continued reduction in the target discount rate

This option is incorrect as it describes a different monetary policy approach. Lowering the discount rate is a conventional method to stimulate the economy but does not involve asset purchases or the expansion of the balance sheet characteristic of quantitative easing.

C) A broad and prolonged sale of Treasury securities

This option is incorrect because it describes the opposite of quantitative easing. Selling Treasury securities would decrease the money supply and is a contractionary measure, not an expansionary one.

D) Providing liquidity to financial institutions other than banks

This option is incorrect as it does not correctly define quantitative easing. While providing liquidity can be a component of broader monetary policy, quantitative easing specifically focuses on asset purchases to increase the money supply, rather than direct liquidity support to institutions.

Conclusion

In summary, option A is definitively correct as it accurately defines quantitative easing through the mechanism of asset purchases that expand the central bank's balance sheet. The other options either misrepresent the concept or outline different monetary policy actions that do not involve asset buying.