1. Use supply-and-demand graphs of the federal funds market in a corridor system to analyze each the following situations. Be sure that your graphs clearly show changes in the equilibrium federal funds rate, changes in the equilibrium level of reserves, and any shifts in the demand and supply curves. a. Suppose that the Fed decides to increase its target for the funds rate from 2% to 2.25% while also increasing the discount rate from 2.5% to 2.75%. Show how the Fed can use open-market operations to bring about a higher equilibrium federal funds rate. Here, you may assume that the interest rate on reserve balances is 1.5% b. Suppose instead that banks increase their demand for reserves. Show how the Fed can offset this change through open-market operations in order to keep the equilibrium federal funds rate unchanged at 2%.
1. Use supply-and-demand graphs of the federal funds market in a corridor system to analyze each the following situations. Be sure that your graphs clearly show changes in the equilibrium federal funds rate, changes in the equilibrium level of reserves, and any shifts in the demand and supply curves. a. Suppose that the Fed decides to increase its target for the funds rate from 2% to 2.25% while also increasing the discount rate from 2.5% to 2.75%. Show how the Fed can use open-market operations to bring about a higher equilibrium federal funds rate. Here, you may assume that the interest rate on reserve balances is 1.5% b. Suppose instead that banks increase their demand for reserves. Show how the Fed can offset this change through open-market operations in order to keep the equilibrium federal funds rate unchanged at 2%.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:1. Use supply-and-demand graphs of the federal funds market in a corridor system to analyze each
the following situations. Be sure that your graphs clearly show changes in the equilibrium
federal funds rate, changes in the equilibrium level of reserves, and any shifts in the demand
and supply curves.
a. Suppose that the Fed decides to increase its target for the funds rate from 2% to 2.25%
while also increasing the discount rate from 2.5% to 2.75%. Show how the Fed can use
open-market operations to bring about a higher equilibrium federal funds rate. Here, you
may assume that the interest rate on reserve balances is 1.5%
b. Suppose instead that banks increase their demand for reserves. Show how the Fed can
offset this change through open-market operations in order to keep the equilibrium federal
funds rate unchanged at 2%.
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