How does a central bank typically implement monetary stimulus?

A central bank typically implements monetary stimulus through actions that increase the money supply and lower interest rates, which stimulates economic activity. One primary method used is through the purchase of government securities. By buying these securities, the central bank injects liquidity into the banking system, which increases the reserves of banks. This infusion of cash encourages banks to lend more to consumers and businesses, stimulating spending and investment.

When the central bank buys government securities, it raises the prices of these securities, which effectively lowers yields and interest rates. Lower interest rates make borrowing cheaper, thus encouraging more borrowing and spending, which can lead to increased economic activity. This process helps to combat issues of low inflation or recession, as it aims to boost overall demand in the economy.

In contrast, raising interest rates and restricting the money supply (the other options) are contractionary policies used to cool down an overheated economy or to control high inflation, which is contrary to the goal of monetary stimulus. Reducing taxes (another alternative) is more of a fiscal policy measure rather than a direct action of a central bank. Thus, the purchase of government securities stands out as a clear and effective method of implementing monetary stimulus.