Question

Following the financial crisis in​ 2008, the Federal Reserve began injecting the banking system with massive amounts of​ liquidity, and at the same​ time, very little lending occurred. As a​ result, the M1 money multiplier was below 1 for most of the time from October 2008 through 2011. How does this relate to your answer to the previous​ step?

Answer 1

Answer:

In situation where, large amounts of federal reserves enter the banking system (resulting in large amount of liquidity) but the federal reserves are withheld by the banking system it would form excess​ reserves. This withholding of reserves would most likely lead to the money multiplier(M1) to fall below one.

As there is a direct relationship between the banking system reserves and the money multiplier.