Assume the Fed creates excess reserves in the banking system by buying government bonds, but banks do not make more loans because economic conditions are bad. This situation is a problem of
A) "putting all your eggs in one basket."
B) "not in my backyard."
C) "There ain't no such thing as a free lunch."
D) "You can lead a horse to water, but you can't make it drink."

Question

Quizplus · Accepted Answer

This situation is an example of the Fed providing liquidity to banks, but the banks not using it to make more loans due to poor economic conditions. This is a classic case of "You can lead a horse to water, but you can't make it drink." The Fed has provided the excess reserves, but the banks are not willing to take the risk of making more loans in a bad economic environment.

Assume the Fed Creates Excess Reserves in the Banking System