IAS Economy Practice Question . 13

In context with money markets, what is Quantitative Easing?
[A]Lowering the interest rates slowly
[B]Lengthening the time of debt repayment
[C]Pumping money in economy directly
[D]Restructuring the cash flow in the system by altering interest rates

Answer: Pumping money in economy directly
We all know that the central banks of the countries usually stimulate a slowing economy by cutting interest rates. When interest rates are cut, people are encouraged to spend by borrowing more or discouraging them to save. But when there is a consistent cut in the interest rates and they become almost zero, then this option can be no longer used. Now, what to do in such circumstances? In such a situation, the central banks resort to pumping money directly into the economy. This “direct pumping of money into economy” is called quantitative easing. Money is directly pumped in the economy by buying bonds, which are usually Government and occasionally Private bonds from banks and financial institutions. In the aftermath of the financial crisis of 2008, the developed countries used quantitative easing to spur growth.

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