Introduction to Finance

Quantitative easing (QE)
is a nontraditional monetary policy approach to stimulate eco-
nomic activity when conventional monetary policy methods are ineff ective. The Fed engages 
in purchasing fi nancial assets from banks and other fi nancial institutions with newly created 
money, resulting in larger bank excess reserves and increased money supply and liquidity. In 
quantitative easing (QE) 
a 
nontraditional monetary policy 
approach to stimulate economic 
activity

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C H A PT E R 4 Federal Reserve System
response to the fi nancial crisis and the Great Recession that has been followed by relatively 
slow economic growth, the Fed has engaged in three rounds (QE1, QE2, and QE3) of quan-
titative easing. QE1 was initiated in late 2008 when the Fed began buying large amounts of 
mortgage-backed securities and Treasury securities from banks. These actions helped avoid 
a fi nancial system collapse and contributed to the recovery from the Great Recession. How-
ever, slowing economic activity in 2010 led to the Fed announcing QE2, which provided 
for the purchase of an additional $600 billion of Treasury securities. In an eff ort to provide 
further monetary liquidity to encourage economic growth, QE3 was initiated in September 
2012 when the Fed stated it planned to purchase $40 billion in mortgage-backed securities per 
month for the foreseeable future. In December 2015, the Fed announced it was commencing a 
money policy normalization process that would lead to higher interest rates.
DISCUSSION QUESTION 3
Did the Fed maintain an easy monetary policy for too many years after the Great Recession?
Implementation of Monetary Policy
Monetary policy has traditionally focused either on trying to control the rate of change or 
growth in the money supply (such as M1) or by targeting a level for a specifi c type of interest 
rate. One interest rate that the Fed’s FOMC could focus on is the