We are going back to the fall of 1998, back in the midst of the new economy. The

Question

We are going back to the fall of 1998, back in the midst of the new economy. The US economy weathered the East Asian quite well and the US economy, by almost all acocunts, was performing brilliantly. In August of 1998, Russia defaulted on all the debt held by foreign investors. This "shock" rattled financial markets so much that the Fed went into action and lowered short term interest rates 3 times in a seven week period. in what follows, we are going to model this 7 weeks period using our new acquired reserve demand/reserve supply diagram.

Hee are the relavant dates and interest rates:

A: August 1998, iff = 5.5%, B September 1998, iff = 5.25%, C: October 1998, iff = 5.00%, D: November 1998, iff = 4.75%

Note importantly, we are modeling the behavior of the federal funds rate during this period. The forcasted reserve demand at this time is given below. For simplicity, the reserve demand function is stable throught this exercise:

Rd = 900-100 iff

what is the value of the Reserve supply in August 1998? Hint: use the Rd equation and the value of iff to get the value for Rd. Remember that Rd = Rs in equilibrium,

A: 375, B: 350, C: 425, OR D: 400

Please show work

Explanation / Answer

B: 350

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