Log out Go to App
Go to App

Learning Materials

Features

Discover

Chapter 26: Q.14 (page 691)

During and after the global financial crisis, the Fed provided banks with large amounts of liquidity. Banks' excess reserves increased sharply, while credit extended to households and firms decreased sharply. Comment on the effectiveness of the bank lending channel during this period.

Short Answer

Expert verified

It is extremely difficult to increase cash related to legal regulations, as the bank's reserves decline even as number of sales assets falls.

Step by step solution

01

Step 1; Concept Introduction.

The accessibility of borrowings and deposits by depository institutions is affected by changes in monetary policy, as shown by the financial intermediation channels.

02

Explanation of solution.

Certificates of deposit were required to be supported by bank reserves and liquidity ceilings under the restrictive banking rules. It is extremely hard to derive capital under these legal limits because the lender's reserves diminish as the number of customer deposits drops.

As a result among these prescribed limits, bank financial assets decreased from August 2014 to August 2017.

Unlock Step-by-Step Solutions & Ace Your Exams!

  • Full Textbook Solutions

    Get detailed explanations and key concepts

  • Unlimited Al creation

    Al flashcards, explanations, exams and more...

  • Ads-free access

    To over 500 millions flashcards

  • Money-back guarantee

    We refund you if you fail your exam.

Start your free trial

Over 30 million students worldwide already upgrade their learning with Vaia!

One App. One Place for Learning.

All the tools & learning materials you need for study success - in one app.

Get started for free

Most popular questions from this chapter

Nobel Prize winner Franco Modigliani found that the most important transmission mechanisms of monetary policy involve consumer expenditure. Describe how at least two of these mechanisms work.

"If the fed funds rate is at zero, the Fed can no longer implement effective accommodative policy." Is this statement true, false, or uncertain? Explain.

"Considering that consumption accounts for nearly two-thirds of total GDP, this means that the interest rate, wealth, and household liquidity channels are the most important monetary policy channels in the U.S." Is this statement true, false, or uncertain? Explain your answer.

Following the global financial crisis, mortgage rates reached record-low levels by 2013 and again in 2016 .

a. What effect should this have had on the economy, according to the household liquidity effect channel?

b. During much of this time, most banks raised their credit standards significantly, making it much more difficult to qualify for home loans and to refinance existing loans. How does this information alter your answer to part (a)?

Why might the bank lending channel be less effective today than it once was?
See all solutions

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Study anywhere. Anytime. Across all devices.

Sign-up for free