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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.

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Most popular questions from this chapter

A "rate cycle" is a period of monetary policy during which the federal funds rate moves from its low point toward its high point, or vice versa, in response to business cycle conditions. Go to the St. Louis Federal Reserve FRED database, and find data on the federal funds rate (FEDFUNDS), real business fixed investment (PNFIC96), real residential investment (PRFIC96), and consumer durable expenditures (PCDGCC96). Use the frequency setting to convert the federal funds rate data to "quarterly," and download the data.

a. When did the last rate cycle begin and end? (Note: If a rate cycle is currently in progress, use the current period as the end.) Is this rate cycle a contractionary or an expansionary rate cycle?

b. Calculate the percentage change in business fixed investment, residential (housing) investment, and consumer durable expenditures over this rate cycle.

c. Based on your answers to parts (a) and (b), how effective was the traditional interest rate channel of monetary policy over this rate cycle?

In the late 1990 s, the stock market was rising rapidly, the economy was growing, and the Federal Reserve kept interest rates relatively low. Comment on how this policy stance would affect the economy as it relates to the Tobin q transmission mechanisms.

If adverse selection and moral hazard increase, how does this affect the ability of monetary policy to address economic downturns?

From 2008 to 2017 , auto loan rates in the United States have declined from around 8% to near historic lows of around 4.5%. At the same time, auto sales increased to near historic high levels by 2017 . How, if at all, does this relate to the monetary transmission mechanisms?

How can expansionary and contractionary monetary policies affect aggregate demand through the exchange rate channel?
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