13. Use demand and supply graphs for the federal funds market (market for reserv

Question

13. Use demand and supply graphs for the federal funds market (market for reserves) to analyze the following situations. Be sure that your graphs clearly show changes in the equilibrium federal funds rate and the equilibrium level of reserves and the Fed action to keep the equilibrium federal fund rate unchanged ( (at the target)

a. Suppose that banks decrease their demand for reserves

b. Suppose that the Fed decides to decrease the required reserve ratio.

c. Suppose that banks increase their demand for reserves

d. Suppose the Fed decreases the discount rate

e. Suppose that the Fed decreases the interest rate on reserves

14. Use the supply and demand analysis of the market for reserves to explain and illustrate the effect of the following events on the federal funds rate and the Fed action to keep the equilibrium interest rate its target. Assume that initial equilibrium federal funds rate is 4 percent

a. There is a switch from currency into deposits, everything else held constant.

b. The Fed decreases discount rate by 50 basis points, everything else held constant

c. Public decided to hold more currency, everything held constant

d. The Fed started to pay interest rate on excess reserves, everything held constant

e. The Fed purchases through the open market $3 billion of Treasury bonds.

Explanation / Answer

13. Use demand and supply graphs for the federal funds market (market for reserv

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