Consider the above graph that shows demand for excess reserves by the banking system as a whole. The discount rate is 4.5 percent and the Fed pays an interest of 1.50 percent on excess reserves. Currently banks as a whole are holding an excess reserve of $70 billion. This means that the equilibrium fed funds rate is 0.03 percent. Suppose that demand for excess reserves by the banking system increases by $20 billion (banks collectively want to hold $20 billion more excess reserves). In that case the equilibrium fed funds rate will increase to 0.02 percent.

Consider the above graph that shows demand for excess reserves by the banking system as a whole. The discount rate is 4.5 percent and the Fed pays an interest of 1.50 percent on excess reserves. Currently banks as a whole are holding an excess reserve of $70 billion. This means that the equilibrium fed funds rate is 0.03 percent. Suppose that demand for excess reserves by the banking system increases by $20 billion (banks collectively want to hold $20 billion more excess reserves). In that case the equilibrium fed funds rate will increase to 0.02 percent.

Microeconomics A Contemporary Intro

10th Edition

ISBN:9781285635101

Author:MCEACHERN

Publisher:MCEACHERN

Chapter13: Capital, Interest, Entrepreneurship, And Corporate Finance

Section: Chapter Questions

Problem 13PAE

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