QE

问题如下：

QuestionUnder which economic conditions is quantitative easing (QE) most likely to aid in the recovery of a struggling economy?

选项：

A.Deflationary trap

B.Declining bank reserves and economic activity

C.Liquidity trap

解释：

1. Incorrect. A deflationary spiral refers to a persistent and widespread decrease in the general price index, posing greater challenges for conventional monetary policies compared to inflation. Once nominal interest rates are lowered to zero by the monetary authority to stimulate the economy, they cannot be further reduced. At this stage, the conditions for a liquidity trap come into play. Deflation raises the real value of debt, while falling prices may discourage current consumption, leading to reduced demand and further deflationary pressure. Consequently, a deflationary "trap" may develop, characterized by sluggish consumption growth, falling prices, and rising levels of real debt.
2. Correct. Quantitative easing (QE) is an "unconventional" monetary policy approach, operationally similar to open market purchase operations but conducted on a larger scale. Central banks create additional reserves through QE, which can be used to purchase various assets. The intention is to stimulate lending, leading to broader money growth and, ultimately, an increase in real economic activity.
3. Incorrect. A liquidity trap occurs when the demand for money becomes infinitely elastic, meaning the demand curve is horizontal, and individuals are willing to hold extra money balances without any change in interest rates. In this extreme scenario, injecting more money into the economy will not further lower interest rates or impact real economic activity, rendering monetary policy fully ineffective.

• describe qualities of effective central banks; contrast their use of inflation, interest rate, and exchange rate targeting in expansionary or contractionary monetary policy; and describe the limitations of monetary policy