After the 2008 ﬁnancial crisis, 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 essentially eliminated the need for banks to borrow in the federal funds market. This meant that changes in the federal funds rate target had little impact on the actual supply of reserves in the banking system, and therefore had limited ability to influence the money supply.

After the 2008 ﬁNancial Crisis, Why Did the Federal Reserve