Answer to Question #191246 in Macroeconomics for James

Question

QUESTION 1

Which of the following statements are correct? Select all that apply.

1. QE2 and QE3 occurred during the expansion following the Great Recession.
2. Many individuals argued that QE would lead to higher inflation rates.
3. In 2017, the Federal Reserve's balance sheet had assets of more than $7 trillion.
4. The Federal Reserve engaged in a fourth round of QE in response to the recession caused by the pandemic.

Answer 1

QE is quantitative easing in an unconventional monetary policy which results in central bank purchase of securities from open market. The central bank purchases even more riskier stocks, bonds this time. This encourages the money supply and helps in lending and investing.

 

1.QE2 was the second round of quantitative easing which took place in 2010 to help the economy recover from Great Recession. Fed had purchased Treasuries worth $600 billion. This increased the money supply. This was followed by QE3 during 2012 to start the housing market.

Solution: correct statement.

2.There is a risk of inflation in case of QE. It has been argued that in case the amount of easing or the amount of money required is overestimated and too much money is created, during recession an economy does not operate so there is less chance of inflation. However if the economy is operating at its full capacity then increasing money supply would cause inflation.

Solution: correct statement

3.Fed’s asset was $4.5 trillion in 2015. However between 2017 to 2019 its asset reduced to $3.9 trillion.

Solution: incorrect statement

 

4.QE4 began in 2013 and has ended in 2014, whereas the Pandemic started in 2019

Solution: incorrect statement