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Chapter 18, Problem 1DAP
To determine

The percentage change in non-borrowed reserves and federal funds rate.

Concept:

Non-Borrowed reserves - Under the fractional reserve banking system, the depository institutions have to keep a fraction of their deposits as reserves with the Fed. The remaining deposits are extended as loans. To satisfy these reserve requirements, banks can borrow from the central bank at an interest rate known as the discount rate. Reserves that are not borrowed in this way are non-borrowed reserves. Non-borrowed reserves are equal to total reserves minus borrowed reserves.

Federal Fund rate - It is the interest rate charged for overnight loans of reserves from one bank to the other. As the federal funds rate increases, the opportunity cost of holding excess reserves rises and the quantity of reserves demanded falls.

Expert Solution & Answer
Check Mark

Explanation of Solution

    observation_dateFEDFUNDSNONBORRES
    2008-05-011.98-108907
    2008-06-012.00-125469
    2008-07-012.01-119687
    2008-08-012.00-122288
    2008-09-011.81-187212
    2008-10-010.97-333521
    2008-11-010.39-89650
    2008-12-010.16167311
    2009-01-010.15296739
    2009-02-010.22118463
    2009-03-010.18166018
    2009-04-010.15323543
    2009-05-010.18377358
    2009-06-010.21371012
    2009-07-010.16429581
    2009-08-010.16497293
    2009-09-010.15615768
    2009-10-010.12791658
    2009-11-010.12924290
    2009-12-010.12970523
    2010-01-010.11970233
    2010-02-010.131114254
    2010-03-010.161092847
    2010-04-010.201037223
    2010-05-010.201035709
    2010-06-010.181029307
    2010-07-010.181021904
    2010-08-010.191024970
    2010-09-010.19995343
    2010-10-010.19991098
    2010-11-010.19991946
    2010-12-010.181032512
    2011-01-010.171078102
    2011-02-010.161241768
    2011-03-010.141414999
    2011-04-010.101510146
    2011-05-010.091574664
    2011-06-010.091652585
    2011-07-010.071684163
    2011-08-010.101654721
    2011-09-010.081631879
    2011-10-010.071627708
    2011-11-010.081582072
    2011-12-010.071589189
    2012-01-010.081610578
    2012-02-010.101651991
    2012-03-010.131599016
    2012-04-010.141579840
    2012-05-010.161552319
    2012-06-010.161550166
    2012-07-010.161579513
    2012-08-010.131578924
    2012-09-010.141515544
    2012-10-010.161524119
    2012-11-010.161545059
    2012-12-010.161569588
    2013-01-010.141636369
    2013-02-010.151732928
    2013-03-010.141810906
    2013-04-010.151884288
    2013-05-010.111981574
    2013-06-010.092062555
    2013-07-010.092147345
    2013-08-010.082252314
    2013-09-010.082333577
    2013-10-010.092427559
    2013-11-010.082516872
    2013-12-010.092540849
    2014-01-010.072556274
    2014-02-010.072650023
    2014-03-010.082676596
    2014-04-010.092714783
    2014-05-010.092688244
    2014-06-010.102722089
    2014-07-010.092758793
    2014-08-010.092841761
    2014-09-010.092814186
    2014-10-010.092760096
    2014-11-010.092574968
    2014-12-010.122665835
    2015-01-010.112745518
    2015-02-010.112556053
    2015-03-010.112732843
    2015-04-010.122756688
    2015-05-010.122641646
    2015-06-010.132610979
    2015-07-010.132649113
    2015-08-010.142665823
    2015-09-010.142701023
    2015-10-010.122725750
    2015-11-010.122660226
    2015-12-010.242481082
    2016-01-010.342439935
    2016-02-010.382510816
    2016-03-010.362519664
    2016-04-010.372486949
    2016-05-010.372443710
    2016-06-010.382427350
    2016-07-010.392370978
    2016-08-010.402413323
    2016-09-010.402324901
    2016-10-010.402155936
    2016-11-010.412201631
    2016-12-010.542095247
    2017-01-010.652158526
    2017-02-010.662302916
    2017-03-010.792387767
    2017-04-010.902344767
    2017-05-010.912288880
    2017-06-011.042269588
    2017-07-011.152296763
    2017-08-011.162406953
    2017-09-011.152357651
    2017-10-011.152310751
    2017-11-011.162378217
    2017-12-011.302309747
    2018-01-011.412280960
    2018-02-011.422305236
    2018-03-011.512230859
    2018-04-011.692150996
    2018-05-011.702086483

Percentage change is calculated using the formula,

Percentagechange=NewvaluePreviousvaluePreviousvalue×100

The most recent month data for both non-borrowed reserves and federal funds rate is available for 01-May-2018.

a. Federal Funds Rate for 01-05-2018 = 1.70

Federal Funds Rate for 01-05-2017= 0.91

    %change=1.700.910.91×100=0.790.91×100=86.81%

Non-Borrowed reserves for 01-05-2018= 2086483

Non-Borrowed reserves for 01-05-2017= 2288880

    %change=208648322888802288880×100=2023972288880×100=0.088%

The percentage change shows that Federal Funds rate rose by 86.81% while, the non-borrowed reserves fell by 0.08%.

b. Federal fund rate is the interest rate charged for overnight loans of reserves from one bank to the other. As the federal funds rate increases, the opportunity cost of holding excess reserves rises and the quantity of reserves demanded falls. Thus, it increases the cost of borrowed reserves and leads to an increase in non-borrowed reserves.

This is contrary to what we see above. Here the Fed fund rate rose from May 2017 to May 2018. However, the non-borrowed reserves declined during the same period.

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