Long recessions often follow banking crises because:
A)banking crises may cause a surplus of credit, so that interest rates fall to levels so low that investors earn very little in interest income.
B)the vicious cycle of deleveraging that follows leads to overpriced assets.
C)consumer and investment spending increase too rapidly, causing high rates of inflation.
D)monetary policy is not very effective because banks hold on to excess reserves and are unwilling to lend them out.

Question

Quizplus · Accepted Answer

During banking crises, banks tend to hold onto excess reserves due to uncertainty and risk aversion, making monetary policy less effective as they are unwilling to lend, leading to prolonged recessions.

Long Recessions Often Follow Banking Crises Because