General Knowledge · Monetary Policy
When a central bank conducts Quantitative Easing by purchasing long-term government bonds from commercial banks, how does this transmission mechanism directly affect commercial banks' balance sheets?
Verified Solution4 OptionsUpdated: October 2026👁️1 View
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- 1It increases the money supply only if physical currency notes are printed.
- 2It leaves the money supply entirely unchanged without affecting bank balance sheets.
- 3It reduces commercial banks' reserves, forcing them to recall existing loans.
- 4It increases commercial banks' excess reserves with the central bank, expanding credit creation capacity.✓
Correct answer
It increases commercial banks' excess reserves with the central bank, expanding credit creation capacity.
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