Final answer:
Quantitative easing is a monetary policy where the central bank buys long-term securities to increase the money supply, lower long-term interest rates, and stimulate aggregate demand, particularly in situations where traditional policy tools are ineffective. An expansionary monetary policy is expected in response to a recession to encourage growth by making borrowing and spending easier.
Step-by-step explanation:
To use quantitative easing to stimulate aggregate demand, a central bank, such as the Federal Reserve, purchases long-term government and private mortgage-backed securities. This influx of capital into the economy effectively increases the money supply, which can lower long-term interest rates and make credit more readily available to consumers and businesses. The goal of quantitative easing is to encourage borrowing and spending, thereby increasing aggregate demand and stimulating economic activity. In contrast to traditional monetary policy, which may involve adjusting short-term interest rates or reserve requirements, quantitative easing specifically targets long-term rates and operates even when short-term rates are near zero, as they were during the recession of 2008.
In response to a recession, one would expect an expansionary monetary policy to be implemented. This type of policy aims to expand the money supply and stimulate economic growth, often through methods like lowering interest rates, reducing reserve requirements, or, as discussed, engaging in quantitative easing. The goal is to combat the economic downturn by encouraging lending and investment and promoting higher levels of spending.