Banking during the Great Recession. During the Great Recession
of 2008-2009, US commercial banks grew nervous about the economic
outlook, in particular borrowers’ ability to repay loans. As a
consequence, commercial banks increased the ratio of reserves to
deposits (i.e. they lent out a smaller fraction of their
deposits).
a. within the AS/AD model, what are the short-run effects on
inflation, real GDP and unemployment of this change in banks’
behavior? Please illustrate using graphs, assuming that the economy
starts...