What is the purpose of quantitative easing?

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The purpose of quantitative easing is to increase the money supply and encourage investment. This monetary policy tool is typically employed by central banks when traditional methods, like lowering interest rates, have become less effective, especially during periods of economic downturn or stagnation. By purchasing financial assets, such as government and corporate bonds, the central bank injects liquidity into the economy, which lowers interest rates and encourages banks to lend more. This increase in the money supply aims to stimulate spending and investment by businesses and consumers, ultimately fostering economic growth.

In contrast to the other options, the intent behind quantitative easing is not to decrease government spending, directly stabilize stock prices, or regulate inflation at a fixed rate. While it may have effects on stock prices and inflation, the primary mechanism and goal of quantitative easing are to bolster economic activity through an enhanced flow of funds in the financial system.

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