Final answer:
Quantitative easing (QE) is used by central banks to stimulate the economy by purchasing long-term securities to lower interest rates and increase liquidity. Initially effective in easing financial conditions and stimulating demand, QE's long-term effectiveness and the challenges associated with reversing the policy raise concerns among economists.
Step-by-step explanation:
Quantitative easing (QE) is a monetary policy instrument used by central banks, such as the Federal Reserve, to stimulate the economy when traditional monetary policy tools have become ineffective. Notably, during the late 2008 recession, with interest rates nearing zero and the economy still struggling, the Fed implemented QE by purchasing long-term government and private mortgage-backed securities.
The economic effects of QE are multi-faceted. Initially, QE encourages lower long-term interest rates, which can boost investment and consumption. The injection of liquidity into the financial system can also lead to increases in asset prices, which may positively impact wealth and consumer confidence.