7. Federal funds rate targeting Aa Aa In conducting monetary policy, the Federal

Question

7. Federal funds rate targeting Aa Aa In conducting monetary policy, the Federal Open Market Committee (FOMC) targets a Federal funds rate and the Federal Reserve Bank of New York uses open-market operations to achieve and maintain the target rate. Suppose that the following graph shows the demand for Federal funds. Use the orange line (square symbols) to plot the supply of Federal funds (also called "the supply of excess reserves") when the FOMC targets a Federal funds rate of 3%. FEDERAL FUNDS RATE (Percent) Fed Funds Supply 20 40 60 80 100 QUANTITY OF RESERVES (Billions of dollars Help Clear All

Explanation / Answer

To lower the Federal funds rate, The Federal Reserve Bank of New York will use open market operations to commercial banks and the public, causing the quantity of reserves in the banking system to increase. This is known as expansionary monetary policy, and such policy will normally lead to an increase in aggregate demand.

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