Question

What condition led the Fed to begin using quantitative easing?

a. Congress authorized the Fed to get involved in fiscal policy.

b. Unemployment and inflation were both rising quickly, rendering traditional monetary policy unusable.

c. The Fed could no longer reduce interest rates.

d. Stagflation rendered open-market operations practically pointless because banks were neither buying nor selling bonds.

Answer 1

Option C.

• Fed had always tried to maintain low interest rates within the economy to avoid unemployment and also to maintain the aggregate demand within the economy.
• But it's attempts failed as they could no longer reduce the interest rates further.
• This forced them to adopt quantitative easing in order to induce more money supply within the economy to decrease the level of growing interest rates.