During the crisis 2007-2011, the monetary base increased by 300% but M1 increased by only 40%. The reason behind might be:

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The prompt presents a macroeconomic puzzle: during 2007-2011, the monetary base surged by about 300% while M1 rose only 40%, indicating a decoupling between base money and the broader money supply.
Option a: 'The open market operations conducted by the FED were not effective.' If open market operations were ineffective, we’d expect a smaller or differently directed impact on the monetary base, but during this period the base expansion was enormous due to unconventional policy tools. The characterization that OMOs were merely ineffective does not fully explain the large base increase paired with modest M1 growth.
Option b: 'Banks decided to hold higher reserves due to increased risk.' This aligns with the observed behavior: during the crisis, banks increased reserves to strengthen liquidity risk buffers and due to deleveraging pressures, the reserve-to-deposit ratio rose. Even with a large base, if banks hold excess reserves (beyond required) and reduce lending, M1 (which includes demand deposits and some checkable deposits) grows slowly. Thus this explanation directly links a surge in base money to a relatively muted expansion of M1 via a retrenchment in lending and higher reserve holdings.
Option c: 'The Treasury deficit increased and the Government had to issue Bonds.' While higher deficits and bond issuance affect fiscal dynamics and debt markets, they do not directly explain why the base would surge while M1 remains subdued. This link is more about fiscal financing than the monetary transmission to the monetary base versus M1 growth, making it an indirect and less direct explanation for the specific base–M1 divergence.
Option d: 'None of the above.' Given that option b offers a plausible mechanism tied to banking behavior during the crisis, selecting none of the above would ignore a reasonable explanation supported by liquidity preference and reserve-holding habits observed in crisis periods.
In summary, option b provides a coherent narrative: increased risk prompted banks to hoard reserves, contributing to a large monetary base expansion without a commensurate rise in M1 due to suppressed lending and higher reserve holdings. The other options either misattribute the mechanism, describe effects that don’t directly map to the base–M1 differential, or claim no explanation where one exists.

BU.220.610.51.FA25 M3 Practice Quiz

During the crisis 2007-2011, the monetary base increased by 300% but M1 increased by only 40%. The reason behind might be:

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