Question

Initially, quantitative easing was not much help in creating economic growth because?

1) Banks did not lend out the excess reserves that were created by quantitative easing.
2) The Federal Reserve also increased the required reserve ratio so additional reserves were not available for lending.
3) The Federal government began to cut spending, which counteracted the expansionary monetary policy.
4) The expansion of the monetary base was inflationary.

Answer 1

Quantitative easing initially struggled to create economic growth as banks held onto excess reserves instead of lending them out, while businesses and consumers were reluctant to borrow during the recession. So the correct answer is option 1.

Step-by-step explanation:

Initially, quantitative easing was not much help in creating economic growth primarily because banks did not lend out the excess reserves that were created by quantitative easing. This situation occurred due to banks' concerns about a deteriorating economy and the preference to hold excess reserves above the legally required level.

Consequently, even though the Federal Reserve implemented this policy to stimulate aggregate demand by making credit available and lowering long-term interest rates, the anticipated boost in lending and economic activity did not materialize as expected.

Demand for loans also remained low as businesses and consumers were hesitant to take on new debt during a recession, recognizing the increased risks to firm sales and job security. The result was that during the deep recession experienced in 2008, expansionary monetary policy, including quantitative easing, had little effect on stimulating economic growth or altering the price level or real GDP.