The Federal Reserve conducted the policy of quantitative easing primarily when

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BlackTom AI · Accepted Answer

To approach this question, consider the context in which the Federal Reserve used quantitative easing (QE).
Option 1: 'the federal funds rate was very sensitive to the change in the money supply.' This statement mischaracterizes QE signaling. QE operates through large-scale asset purchases to influence long-term rates and liquidity, not by claiming the funds rate is extremely sensitive to money supply in a narrow sense. The effectiveness of QE is tied to signaling and portfolio balance effects rather than a simple sensitivity description.
Option 2: 'the federal funds rate was too erratic to be controlled.' In QE episodes, the Fed sought to influence expectations and stabilize markets, not to contend with an out-of-control funds rate. Describing the funds rate as erratic misstates the policy environment; the Fed uses QE precisely to guide expectations and smooth conditions when conventional policy is constrained.
Option 3: 'the federal funds rate was close to zero.' This is the classic scenario that prompted QE: after the 2008 financial crisis and again in other crises, the federal funds rate hit near zero, limiting traditional policy tools. QE was adopted to lower longer-term interest rates and support credit and spending when the policy rate could not be pushed lower.
Option 4: 'the federal funds rate was relatively high.' A relatively high funds rate would reduce the perceived need for QE; QE is typically deployed when policy rates are already very low and further rate cuts are unlikely to stimulate spending. Hence this description does not align with the typical rationale for QE.
In summary, the rationale behind QE centers on the desire to stimulate the economy when policy rates are at or near zero and conventional tools are constrained, making the near-zero funds rate scenario the most consistent explanation. Each alternative either overstates or mischaracterizes the mechanics or circumstances under which QE is employed, rather than reflecting the standard trigger for its use.

W25 ECON D001 52Z Prin Macroeconomics FinalExamECON1

The Federal Reserve conducted the policy of quantitative easing primarily when

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