During the 2007–2009 financial crisis, banks faced liquidity problems, in part due to the illiquidity of some of their assets. These problems made some banks reluctant to lend, making it difficult for...

liquidity problems, in part due to the illiquidity of

some of their assets. These problems made some

banks reluctant to lend, making it difficult for

households and firms to borrow funds, which in

turn caused economic activity to decline.

a. Explain how the Fed can use the bank lending

channel and the balance sheet channel to

solve this problem.

b. Was the Fed effective in using these channels

during this period? Briefly explain.