Question

A main reason why the Fed introduced large-scale asset purchases (quantitative easing) to deal with the Great Recession was

a. It had already lowered its policy rate to zero and could go no lower

b. It was in an experimental mood

c. It sought to relieve pressure on the federal budget

d. This was a coordinated action with foreign central banks

Answer 1

Correct option is > a. It had already lowered its policy rate to zero and could go no lower

The central banks (Fed) manage liquidity by changing interest rates in market through their monetary policy.

During great recession, market observed huge liquidity crunch. Central bank already applied conventional monetary policy to bring back the liquidity but it could not restore liquidity back. Quantitative easing is technique where central banks purchase large scale assets to increase the liquidity in the market hence, central back resort to purchase large scale assets to deal with Great recession.