5.0 Sn L 4.5 Sn Dr 4.0 100 150 200 250 Quantity of Reserves (SB) If the Federal

Question

5.0 Sn L 4.5 Sn Dr 4.0 100 150 200 250 Quantity of Reserves (SB) If the Federal funds market is at equilibrium at point C and the Federal Reserve decides to use open-market operations to add an additional $50 billion in available reserves, the Federal funds rate will: 1) Fall to 4.0 percent and the total amount of reserves will be $150 2) Fall to 4.0 percent and the total amount of reserves will be $250 3) Rise to 5.0 percent and the total amount of reserves will be $150 4) Rise to 5.0 percent and the total amount of reserves will be $250 ,e ved

Explanation / Answer

2) Fall to 4 percent and the total amount of reserves will be $ 250

Increase in reserves means Fed want to maintain reserve of $ 250 billion and this can be done when federal funds rate reduces to 4%.

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