Question

Explain how to use quantitative easing to stimulate aggregate demand.

Short answer

Quantitative easing should, in theory, lower long-term interest rates while increasing aggregate demand.

Step-by-step solution

Concept of Quantitative Easing 

Quantitative easing is a type of monetary policy in which a government's central bank aims to enhance liquidity in the economy by purchasing long-term state bonds from the government's largest banks.

Stimulation of aggregate demand. 

Purchases of long-term bonds and mortgages of private-backed deposits were used to implement quantitative easing. These two activities had a significant impact on the situation. Purchasing long-term deposits at a lower long-term interest rate while dragging tainted investments off of hidden bodies' balance sheets provided power to personal bodies' economic conditions as well as the entire economy. It also helps to stimulate aggregate demand by lowering borrowing costs and lending fees.