As a result of the Fed's actions during the 2008 financial crisis and banks' lending policies,the money multiplier ________ as a direct result of the ________.
A)fell from about 9 to about 4;surge in banks' desired reserve ratios as they took on less risk
B)rose from about 4 to about 9;surge in banks' desired reserve ratios as they took on less risk
C)fell from about 9 to about 4;low risk experienced by banks because of the FDIC increasing their default coverage amounts
D)rose drastically;consistent decrease in banks' desired reserve ratios as they took on less risk
E)decreased drastically;consistent decrease in banks' desired reserve ratios as they took on less risk

Question

Quizplus · Accepted Answer

During the 2008 financial crisis, the Fed lowered interest rates and engaged in quantitative easing to inject liquidity into the economy. However, banks also became more cautious and increased their desired reserve ratios, meaning they held onto more of their deposits as reserves rather than loaning them out. This decreased the money multiplier, which measures the amount of money the banking system can create from each dollar of reserves. Prior to the crisis, the money multiplier was around 9, but it fell to around 4 as a result of the Fed's actions and banks' lending policies. Therefore, Choice A is the correct answer.

As a Result of the Fed's Actions During the 2008