As the Fed shifted to a highly expansionary monetary policy during the second half of 2008, why were banks reluctant to extend loans and make investments?
A) Banks did not have enough excess reserves to extend loans and make investments.
B) The demand for loans was weak and the business climate was uncertain.
C) The rate of return on short-term investments was high, so banks were reluctant to make long-term investments.
D) The interest rate that the Fed pays on excess reserves was maintained at a high rate.

Question

Quizplus · Accepted Answer

Banks were reluctant to extend loans and make investments because the demand for loans was weak and the business climate was uncertain. This means that even with the Fed's expansionary monetary policy, there was not much demand from borrowers for loans or investments, which made it less attractive for banks to take risks and extend credit.

As the Fed Shifted to a Highly Expansionary Monetary Policy