Karen Dynan, a former Federal Reserve economist, was quoted as stating: The size of the Fed’s balance sheet, which has more than doubled since the financial crisis of 2008, and the large amount of reserves sitting at the Fed has made officials at the central bank nervous about the potential for rapid inflation once banks decide to start lending more vigorously again.
a. Why do you think the Fed’s balance sheet has doubled since 2008?
b. What is the connection between the Fed’s balance sheet having doubled and the large increase in bank reserves at the Fed? Explain using the Fed’s T-account.
c. Why might the banks’ decision to start lending more vigorously again lead to inflation? Explain.