After the financial crisis of 2007-2009, why did the Federal Reserve effectively lose its ability to increase the money supply by manipulating the federal funds rate target?
A)Regulatory changes in response to the financial crisis significantly restricted the use of the federal funds rate target.
B)The increase in excess reserves in the banking system virtually eliminated the need for banks to borrow in the federal funds market.
C)Borrowing of excess reserves moved from traditional banks to the shadow banking industry.
D)The federal funds rate rose significantly and would not respond to Fed changes in the supply of reserves.

Question

Quizplus · Accepted Answer

The increase in excess reserves in the banking system meant that banks had less need to borrow in the federal funds market, reducing the effectiveness of the federal funds rate as a tool for monetary policy.

After the Financial Crisis of 2007-2009, Why Did the Federal