I have a question regarding an economics problem Use reserve market\'s supply-de
ID: 1217559 • Letter: I
Question
I have a question regarding an economics problem Use reserve market's supply-demand diagram to predict the change in the federal funds rate Use reserve market's supply-demand diagram to predic the change in the federal funds when each of the following events occurs. If multiple outcomes exist, show only one of them State how the federal funds rate will change in one sentence for full credit. (3 points each) Assume the initial federal funds rate is between the discount rate and the interest rate paid on reserves. Show the effect of an open market sale. a. b. Assume the initial federal funds rate equals to the interest rate paid on reserves. Show the effect of an increase in reserve requirement Assume the initial federal funds rate equals to the discount rate. Show the effect ofa decrease in discount rate c.
Explanation / Answer
Federal funds are excess reserves of a bank deposited to their regional reserve bank. This can be lent as a borrowing to other banks in case they have insufficient reserves. Federal funds rate is the interest rate charged by one bank to another to borrow fed funds overnight.
Low federal funds rate means expansion in monetary policy by the federal reserve. This makes the borrowing easy for the banks. This makes an increase in supply of federal funds as reduction in funds rate encourages commercial banks to take borrowings to meet reserve requirements. High federal funds rate means contraction in monetary policy. It makes borrowing difficult for the banks.
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