When the fed substantially increased the reserves of the banking system and short-term interest rates fell to near zero during 2009-2012, which of the following occurred?
A) Nominal GDP grew rapidly.
B) The velocity of the M1 and M2 money supplies decreased sharply.
C) The rate of inflation increased sharply.
D) The S&P 500 index of stock prices declined substantially.

Question

Quizplus · Accepted Answer

When the Fed increased reserves, it was essentially increasing the money supply. With short-term interest rates near zero, there was little incentive for banks to loan out these excess reserves, leading to a decrease in the velocity (or turnover) of money. This means that the same amount of money was being used less frequently, which can lead to slower economic growth. Nominal GDP may have still grown, but not necessarily rapidly. The rate of inflation may have increased slightly, but not sharply. The S&P 500 index may have declined during this time period, but it would not be directly related to the Fed's increase in reserves and decrease in interest rates.

When the Fed Substantially Increased the Reserves of the Banking