QE & QT — Practice Questions - Quiz Questions
Nine questions to check your grasp of Quantitative Easing (QE), Quantitative Tightening (QT), the central-bank first principle (Assets $=$ Liabilities), and the real-world transmission to interest rates, asset valuations, and inflation.
1. In a QE operation, the central bank conjures $100$ billion USD of reserves out of nothing and uses them to buy $100$ billion USD of Treasury bonds from a primary dealer. After this operation, by how much have the "Assets" and "Liabilities" sides of the central-bank balance sheet changed respectively?
- A. Assets $+100$ billion USD, Liabilities unchanged (the central bank's net worth grew by $100$ billion USD out of thin air)
- B. Assets $+100$ billion USD, Liabilities $+100$ billion USD (simultaneous expansion)
- C. Assets unchanged, Liabilities $+100$ billion USD (the central bank simply "printed money")
- D. Assets $+100$ billion USD, Liabilities $-100$ billion USD (asset swap)
2. Why is the central bank not allowed to buy newly issued Treasuries directly from the Treasury, but must instead route through a primary dealer as an intermediary?
- A. Primary dealers earn a fee, which is part of the central bank's profit model
- B. The central bank doesn't have enough funds to buy all newly issued Treasuries directly
- C. It is legally prohibited as "deficit monetisation" — letting the central bank fund the Treasury directly amounts to giving the government unlimited credit, which destroys monetary discipline
- D. Primary dealers are better at pricing Treasuries, so they help the central bank buy bonds more cheaply
3. [Calculation] Suppose a country starts with $100$ billion USD of market liquidity. The central bank then performs $3$ rounds of QE (each injecting $100$ billion USD) and $1$ round of QT (each draining $100$ billion USD). What is the final market liquidity?
- A. $200$ billion USD
- B. $300$ billion USD
- C. $400$ billion USD
- D. $500$ billion USD
4. In this experiment's QT demo, Step ② shows the Treasury issuing new bonds to the private market and pulling $100$ billion USD of cash out of it. Suppose Step ③ ("central bank destroys money") were skipped, and the Treasury instead spent that $100$ billion USD back into the private sector. What would happen to market liquidity in the end?
- A. Market liquidity decreases by $100$ billion USD permanently
- B. Market liquidity decreases by $100$ billion USD temporarily, then recovers — equivalent to a fiscal transfer-for-debt swap, with no real balance-sheet contraction
- C. Market liquidity actually increases by $100$ billion USD
- D. The central bank's balance sheet shrinks by $100$ billion USD automatically
5. On this experiment's "Real-World Impact" panel, after QE Step ④ completes, the three gauges should show:
- A. Rate "surging," valuations "deflating," inflation "mild"
- B. Rate "very low," valuations "soaring," inflation "overheating"
- C. Rate "normal," valuations "normal," inflation "target $2\%$"
- D. Rate "very low," valuations "deflating," inflation "overheating"
6. If you wanted to use this experiment's visualisation to prove to a friend that "QE is not the central bank handing money to ordinary people," which step would be the most effective demonstration?
- A. QE Step ① — show the Treasury issuing an IOU and point out that market liquidity has not moved
- B. QE Step ③ — point out that the freshly minted $100$ billion USD of reserves goes directly to the primary dealer (e.g. JPMorgan), not into ordinary households' bank accounts; ordinary household balances do not increase as a direct result
- C. QE Step ④ — show that the market-liquidity bar ultimately doubles
- D. Switching to QT mode — show that the central bank can also reverse the operation and destroy money
7. From $2008$ to $2014$ the Federal Reserve performed three rounds of QE, expanding the balance sheet from about $0.9$ trillion USD to about $4.5$ trillion USD, yet US CPI inflation stayed below the $2\%$ target for years. This contrasts sharply with the $2020$–$2022$ "QE plus inflation hitting a $40$-year high." The most reasonable explanation is:
- A. The $2008$ round did not print enough money, so it did not cause inflation
- B. Central-bank expansion creates "base money (reserves)," but for that to convert into circulating "broad money M2" and push prices up, commercial banks must be willing to lend; after $2008$ banks were broadly unwilling to lend (still nursing bad-loan losses), so QE's proceeds sat as excess reserves at the central bank
- C. The $2020$-onward inflation was entirely caused by QE, with no other factors involved
- D. The Fed's CPI methodology in $2014$ was flawed
8. If the central bank's balance sheet records $1$ trillion USD of Treasury bonds on the assets side, the corresponding entry on the liabilities side should be:
- A. $1$ trillion USD of gold reserves
- B. $1$ trillion USD of currency in circulation plus commercial-bank reserves (together: base money)
- C. $1$ trillion USD of government tax revenue
- D. $1$ trillion USD of foreign-exchange reserves
9. By default this experiment uses $100$ billion USD per QE injection and $100$ billion USD per QT drain. To use the visualisation to quantitatively investigate "how different paces of central-bank balance-sheet expansion affect the inflation gauge," the correct experimental design would be:
- A. Change the QE injection amount and the QT drain amount at the same time
- B. Hold all other mode parameters constant and only compare the inflation-gauge position after $1$ consecutive QE round versus $3$ consecutive QE rounds (control-variable method)
- C. Look at the inflation gauge after a single QT, with no control group needed
- D. Look at the inflation gauge in the initial state