Discuss what experience concerning required reserves occurred during the Great Depression that contributes to the decision today not to use required reserves as an active tool of monetary policy.
What will be an ideal response?
Following the banking crisis of the early years of the depression many banks began accumulating excess reserves, likely to have insurance in the event of a run on their bank. The Federal Reserve Board viewed the high level of excess reserves as potential fuel for a rapid expansion of deposits and loans, which could become potentially inflationary. In mid to late August of 1936 the Fed used their powers to effectively double the reserve requirement. Bank executives used the following year to rebuild their reserve balances back to where they were. Even though the monetary base was quite stable this action forced the amounts in M1 and M2 lower, which meant the money multiplier was lower, and economic activity followed the path of M1 and M2 as GDP fell more than 10 percent in 1937.
You might also like to view...
Which of the following statements is true?
a. In the case of positive externalities, a private market will produce too little of a good compared to the socially efficient level of output. b. In the case of positive externalities, a private market will produce too much of a good compared to the socially efficient level of output. c. Negative externalities occur when benefits accrue to individuals not directly involved in a transaction. d. Positive externalities occur when costs are imposed on individuals not directly involved in a transaction. e. In the case of negative externalities, a private market will produce too little of a good compared to the socially efficient level of output.
The provisions of which of the following labor legislation allowed the president to seek a court injunction to prevent a strike for 80 days if the nation's economy is at risk?
a. Landrum-Griffen Act b. Taft-Hartley Act c. Wagner Act d. Walsh-Healy Act
The Bretton Woods Conference:
a. established a system of fixed exchange rates. b. established a system of flexible exchange rates. c. established a dirty float exchange rate system. d. did none of the above.
The owner of a patented invention
A) may or may not have a legal monopoly. B) is guaranteed a profit since her idea cannot be copied. C) will always have demand high enough and costs low enough to ensure a profit. D) will only earn a profit if average total cost is less than price.