Quantitative easing (QE) operates by the central bank selling government bonds to commercial banks, which increases liquid reserves in the banking system and lowers long-term interest rates.

An increase in the central bank base rate can lead to an appreciation of the domestic currency, which helps to lower inflation by reducing the domestic currency price of imported raw materials and finished goods.

During a liquidity trap, further reductions in the policy interest rate are highly effective at stimulating aggregate demand because commercial banks are eager to expand credit.

A reduction in the commercial banks' reserve requirement ratio by the central bank is a contractionary monetary policy instrument designed to restrict credit creation.