Reference no: EM131515603

Under expansionary monetary policy, the Federal Reserve increases the money supply allowing the banking system to make additional loans - which increases the money supply even more - resulting in higher economic growth. During the last recession (2008-09), the Federal Reserve injected a huge amount of money into the economy, yet banks did not increase their loans very much. As a result, the money supply did not increase by nearly as much as the Federal Reserve wanted and economic recovery in the U.S. has been slow

Use your knowledge of the Federal Reserve, the impact of monetary policy on economic performance, and the economic conditions leading up to the 2008-09 recession to answer the following question:

Why were banks so reluctant to increase their lending activity despite the use of expansionary monetary policy by the Federal Reserve?