Quantitative easing is a type of monetary policy where the central bank of a country buys financial assets from commercial banks.
These financial assets are usually government bonds (see definition below). When the government purchases these bonds they credit the commercial banks who will then have more money to lend to consumers and businesses.
Quantitative easing is therefore a method for the government to increase the money supply. The central bank is not ’printing money’ but they are injecting electronic money into the economy which previously did not exist.
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Key terms:
Money supply – the total amount of money circulating in an economy.
Bond – a financial product where money is lent to an organisation and they agree to pay back the full amount by a given date as well as pay regular interest payment. Bonds can be bought and sold, so the owner of the bonds own the right to the repayments.