What typically happens when a central bank implements quantitative easing?

• A. The economy enters a period of austerity
• B. Investment opportunities sharply decrease
• C. The money supply in the economy increases
• D. Interest rates rise significantly

Answer: (C)

When a central bank implements quantitative easing, its primary goal is to stimulate the economy, especially during periods of economic downturn or low inflation. By purchasing financial assets, such as government and corporate bonds, the central bank injects liquidity into the financial system. This process increases the overall money supply in the economy.

By increasing the money supply, quantitative easing aims to lower interest rates, which in turn encourages borrowing and investing. As financial institutions have more money on hand, they can lend more easily to businesses and consumers, promoting spending and investment. This mechanism is intended to spur economic growth, boost employment, and help prevent deflation.

In contrast to this, periods of austerity typically involve government measures aimed at reducing budget deficits, which can lead to reduced government spending rather than increasing the money supply. Investment opportunities decreasing or significant rises in interest rates do not correlate directly with quantitative easing, as the strategy is essentially about increasing available capital and lowering borrowing costs. Thus, the correct answer highlights the central purpose and primary outcome of quantitative easing: an increase in the money supply in the economy.