Question #1

Quantitative easing

• involves the central bank printing new money and is thus the same as government spending which is not financed by debt
• is when the central bank floods the banks with new money (new net financial assets) to encourage them to lend in order to ease the credit crunch
• is when the central bank purchases investment maturity bonds in return for bank reserves and involves no change in the net financial assets of the non-government sector.

Answer #36

Answer: is when the central bank purchases investment maturity bonds in return for bank reserves and involves no change in the net financial assets of the non-government sector.

Explanation

Quantitative easing is when the central bank buys one type of financial asset (private holdings of bonds, company paper) in return for another asset (reserve balances at the central bank). The net financial assets in the private sector are in fact unchanged although the portfolio composition of those assets is altered (maturity substitution) which changes yields and returns. Quantitative easing increases central bank demand for "long maturity" assets held in the private sector which reduces interest rates at the longer end of the yield curve. These are traditionally thought of as the investment rates. This might increase aggregate demand given the cost of investment funds is likely to drop. But on the other hand, the lower rates reduce the interest-income of savers who will reduce consumption (demand) accordingly.