Author Question: During the Financial Crisis of 2007-2009, banks significantly increased their holdings of excess ... (Read 94 times)

jc611 · **on:** Jun 30, 2018

During the Financial Crisis of 2007-2009, banks significantly increased their holdings of excess reserves. What impact did this have on the money multiplier? How would the Fed change the monetary base if it wanted to maintain a stable money supply?

What will be an ideal response?

Question 2

Monetary policy credibility has the benefit of ________.

A) stabilizing inflation in the short run when faced with positive demand shocks
B) stabilizing economic activity in the short run when faced with positive demand shocks
C) transmitting the effect of aggregate demand shocks onto short-run aggregate supply
D) enhancing the job opportunities of Federal Reserve officials after they leave the central bank

rnehls · **Reply #1 on:** Jun 30, 2018

Answer to Question 1

An increase in the excess-to-deposit ratio results in a lower money multiplier. Left alone, this would reduce the money supply. If the Fed want a stable money supply, it would increase the monetary base enough to offset the decline in the money multiplier.

Answer to Question 2

A