During the mid-to-late 1930s
A)the Fed cut reserve requirements in order to stimulate the economy.
B)banks accumulated substantial excess reserves.
C)the Fed successfully reduced bank holdings of excess reserves by raising required reserve ratios.
D)the economy grew rapidly despite large increases in bank holdings of excess reserves and increases in required reserve ratios.

Question

Quizplus · Accepted Answer

During the mid-to-late 1930s, banks accumulated substantial excess reserves due to a lack of lending opportunities and the cautious behavior of banks after the stock market crash of 1929. The Fed did not cut reserve requirements during this time period, but instead raised them in 1936 in an attempt to reduce bank holdings of excess reserves. However, this action had the opposite effect of further increasing excess reserves as banks hoarded more funds to meet the new requirements. The economy did not grow rapidly during this time period and instead experienced a severe recession in 1937-1938.

During the Mid-To-Late 1930s