What is quantitative easing?

Quantitative easing is a monetary policy instrument used by central banks to stimulate the economy, particularly during periods of economic downturn or when traditional monetary policy has become ineffective. The correct answer focuses on the central bank's action of purchasing longer-term securities.

By buying these securities, the central bank injects liquidity into the financial system, which lowers interest rates and encourages lending and investment. This increased liquidity aims to boost economic activity by making borrowing cheaper, thereby stimulating spending by consumers and businesses. The goal is to promote economic growth and combat deflationary pressures.

The other options relate to different economic strategies or policies that do not accurately describe quantitative easing. For instance, standard monetary policy involving interest rate hikes would typically tighten the money supply rather than increase it. A policy that reduces the money supply goes against the principles of quantitative easing, which seeks to expand it. Lastly, increasing taxes to control inflation is more of a fiscal policy approach, not a monetary policy tool like quantitative easing.