In conducting expansionary monetary policy, even if the Federal Reserve Bank is providing reserves to the banking system, during a recession or during periods of slow economic growth, banks may choose not to lend out their reserves when interest rates are low and potential borrowers look risky. This is known as a “credit crunch”. Explain how a credit crunch affects economic growth. Specifically, answer these questions in your post:
- How does a credit crunch affect consumer spending and business investment?
- How does a credit crunch affect aggregate demand, GDP, and unemployment?
Reference: Chapter 14.1 Is Monetary Policy Effective? and section 14.3: Domestic Sectoral Effects.
From 2007-2010, the Federal Reserve Bank (the Fed) used many practices that had never before been seen from the central bank of the United States.
Discuss the some of the actions that the Fed took during this period. Such as:
- How the Federal Reserve’s lending practices changed during this period.
- What did the Federal Reserve do to support firms deemed “too big to fail.”
Do you believe these actions were necessary to avoid a collapse in the financial system?