In the wake of the Great Recession (2007-2009), how did the amount of reserves held by banks in the United States change?

• A. Reserves held by banks were eliminated entirely.
• B. Reserves held by banks increased significantly.
• C. Reserves held by banks remained unchanged.
• D. Reserves held by banks decreased sharply.

Answer: (B)

Verified step by step guidance

1. Step 1: Understand what bank reserves are — these are the amounts of funds that banks hold in their vaults or at the central bank, which are not lent out or invested. Reserves are important for liquidity and regulatory requirements.
2. Step 2: Recall the context of the Great Recession (2007-2009), a period of severe financial stress where the Federal Reserve took extraordinary measures to stabilize the banking system and economy.
3. Step 3: Recognize that during and after the Great Recession, the Federal Reserve implemented policies such as quantitative easing, which involved large-scale asset purchases that increased the reserves in the banking system.
4. Step 4: Understand that banks, facing uncertainty and stricter regulations, chose to hold onto more reserves rather than lending them out, leading to a significant increase in reserves held by banks.
5. Step 5: Conclude that the correct characterization of bank reserves during this period is that reserves held by banks increased significantly, reflecting both policy actions and banks' cautious behavior.