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During the financial crisis of​ 2007-2008, the Bank of Canada took extraordinary actions to inject liquidity into the banking system. As a​ result, the amount of reserves in the banking system increased significantly.
 
a. Why might the Bank choose to increase reserves in the banking system in such an economic​ environment?

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Related questions

Why is the shadow banking system an important part of the 2007-2009 financial crisis?

A. The shadow banking system was able to take on significantly less risk than other financial firms, preventing the economy from losses.

B. An increase of funding from the shadow banking system resulted in a decrease in the issuance of CDOs, increasing the severity of adverse selection and moral hazard problems.

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Banking panics and regulations

Which of the following describes a common cause of bank panics? Check all that apply.

A. Bank regulators are bureaucrats who do not keep up with real-world banking issues.

B. Bank executives are not trained in risk management.

C. Rumors that a bank is in financial trouble spread easily.

 

Which of the following are reasons why bank panics were largely eliminated after 1933? Check all that apply.

A. The Federal Reserve ("the Fed") stands ready to inject reserves into the system more quickly in a crisis.

B. State-chartered banks are freer from the Fed's regulations.

C. The Fed and other government agencies continuously monitor the financial condition of banks.

(a.) Third National Bank is fully loaned up with reserves of$30,000 and demand deposits equal to $100,000. The reserve ratio is5%. Households deposit $20,000 in currency into the bank. How much excess reserves does the bank now have, and what is the maximum amount of new money that can be created in the banking system as a result of this deposit? Show all work.

(b.) What is the fed funds rate in the banking system? Explain how the Fed manipulates this rate to achieve macroeconomic objectives.

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