Final answer:
Quantitative Easing is a monetary policy where the Federal Reserve buys long-term bonds, including private mortgage-backed securities, to stimulate the economy during a financial crisis, specifically the 2008 crisis.
Step-by-step explanation:
Quantitative Easing (QE) refers to policy actions by central banks, particularly the U.S. Federal Reserve, during the 2008 financial crisis. As traditional monetary policy tools were inadequate due to near-zero short-term interest rates, the Federal Reserve implemented QE to stimulate the economy. This unconventional monetary policy involved the purchase of long-term government and private mortgage-backed securities to increase credit availability and stimulate aggregate demand. This strategy was distinct from traditional tools in two main ways: the purchase of long-term bonds over short-term bills, and expanding the types of securities purchased to include private mortgage-backed securities in addition to government ones.
The first round of QE, known as QE₁, began in November 2008, with the Fed purchasing $600 billion in mortgage-backed securities from government-sponsored enterprises Fannie Mae and Freddie Mac. The goal was to lower long-term interest rates and to remove toxic assets from the balance sheets of financial institutions, strengthening the financial system.