Quantitative easing is characterized by which of the following?

Quantitative easing (QE) is a monetary policy used by central banks, particularly in times of economic downturn, to stimulate the economy. It primarily involves the central bank increasing the money supply by purchasing financial assets, which leads to an increase in bank reserves.

The correct choice highlights how QE entails expanding the supply of aggregate reserves beyond the amount needed to maintain a specific policy rate target. By doing so, the central bank injects liquidity into the banking system, which can lower interest rates and encourage borrowing and spending. This broader expansion of reserves supports various objectives, such as promoting employment and supporting economic activity during periods of low inflation or deflation.

The other options touch on different aspects of monetary policy but do not adequately capture the essence of quantitative easing. For example, while altering the composition of the Fed's balance sheet may be a result of QE, the focus of the correct response is on the overall increase in reserves. Similarly, forward guidance (statements about future policy targets) and the impact on interest on excess reserves (IOER) touch on related but distinct policies that do not represent the core characteristic of QE itself. Understanding these distinctions helps clarify the unique mechanics of quantitative easing as a tool for economic stimulus.