Final answer:
Open market purchases and quantitative easing are both monetary policy tools. Open market purchases involve short-term Treasury bills to manage short-term interest rates, while QE involves buying long-term securities to lower long-term interest rates and stimulate aggregate demand, especially when short-term rates are near zero.
Step-by-step explanation:
The similarities and differences between an open market purchase and quantitative easing (QE) can be understood in the context of monetary policy. Both are tools used by central banks to manage the economy. Traditionally, an open market purchase is when the central bank buys short-term Treasury bills to influence short-term interest rates and expand the money supply.
However, when short-term interest rates are already near zero and cannot be lowered further, as was the case in 2008, the central bank may resort to quantitative easing. This involves purchasing long-term government and private mortgage-backed securities to make credit available with the goal of stimulating aggregate demand. By buying these long-term securities, the Federal Reserve aims to lower long-term interest rates, encourage borrowing, and enhance economic activity.