Expansionary Monetary Policy involves the Federal Reserve injecting money into the economy. Banks then take these ‘new reserves’ and loan them out, which effectively ‘creates’ money by allowing borrowers to use money that belongs to someone else. When borrowers purchase goods with this money, it ends up in the bank of whoever sold the goods to the borrower. This bank then loans out these ‘new reserves’ to another borrower, creating even more money. This process repeats over and over again, creating more & more money (the multiplier effect). This increase in the money supply is done to increase total spending in the overall economy to achieve economic growth.
The Federal Reserve injected a huge amount of money into the economy in response to the U.S. recession of 2008-9, but banks did not increase their loans very much, so the money supply did not increase by nearly as much as the Federal Reserve wanted. Write a short paragraph explaining why you think that banks were so reluctant to increase their loaning activity.
Global economy experienced a prolonged recession in the period 2008-09 that started to crawl in the US economy. Rising... View the full answer
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After 2008 economic crisis banks were just shocked by the scale of crisis, not to mention some of the leading banks were on... View the full answer
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- Jul 20, 2016 at 1:48pm
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- Jul 20, 2016 at 1:49pm