Source: “Bank Lending Signals a Strengthening Economy” by James C. Cooper, from Fiscal Times website, August 1st, 2011. https://www.thefiscaltimes.com/Columns/2011/08/01/Bank-Lending-Signals-a-Strengthening-Economy
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Explanation & Answer
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The Fed made efforts to increase money supply during the recession of 2007-009.
However, these efforts would not raise money supply if banks became reluctant to lend and
households were not willing to borrow (Axilrod). For money supply to increase money should be
circulating in the economy, and this happens if banks lend more while borrowers are willing to
borrow. The effective increase in money supply is achieved by influencing discount rate, reserve
ratio, and open markets operations. However, banks are used as a means of achieving this goal.
The Fed can reduce the reserve ratio to increase loanable funds that banks have. Ho...
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