You are given the following Channel/Corridor model: Federal funds rate, n S, 0.2

Question

You are given the following Channel/Corridor model: Federal funds rate, n S, 0.25% R2 R Reserves, R 18. The initial equilibrium is at D- S1. Looking at the graph, the Fed has: a. b. c. d. Expanded the Monetary Base. Contracted the Monetary Base. Paid the interest rate of 0.5% on banks reserves (R). Paid the interest rate of 0.25% on banks reserves (R). 19. At the initial equilibrium (D - S1), the discount rate charged on discount loans should be: a. Zero. b. 0.25%. c. More than 0.25%, but less than 0.5%. d. More than 0.5%, but less than 0.75%. 20. At the initial equilibrium (D a. 0.25% S1), the interest rate paid on banks reserves with the Fed is: More than 0.25%, but less than 0.5% c, 0.5%, but less than 0.75% d. Less than 0.25% billions of dollars) Variables Imports of goods and services Exports of goods and services Net interest Net transfers Foreign in vestment in the United States U.S. investment abroad 1,400 1,600 480 700

Explanation / Answer

Answer : 18) The initial equilibrium is at D=S1.Looking at the graph , the Fed has : b. contracted the Monetary base. Because of contraction supply curve shifts to leftward but in case of expansion supply curve shift to rightward. In the diagram supply curve shifts to leftward. Therefore, there is contractionary monetary base.

19) At the initial equilibrium (D=S1) , the discount rate charged on discount loans should be : a. Zero. Because there is no any discount loan as there D=S1.

20) At the initial equilibrium (D=S1) , the interest rate paid on bank reserves with the Fed is : a. 0.25%. It is clearly shown by the given diagram.

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