EBK ECONOMICS
13th Edition
ISBN: 8220106799642
Author: PARKIN
Publisher: PEARSON
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Question
Chapter 31, Problem 26APA
To determine
Identify the open market purchase of securities to influence the federal funds rate if the bank raises the amount of reserves.
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The following graph shows a hypothetical demand function for federal funds. Currently, the total
amount of reserves in the banking system is $50 billion, the discount rate is 3.5 percent, and
interest on reserves equals IOR = 1 percent. The Fed wants to reduce the equilibrium fed funds
rate to 1.5% by reducing the discount rate. In that case, it has to stand ready to provide $X billion
of discount loans to the commercial banks at the new discount rate. What is the value of X?
Federal Funds Rate (FFR)
5.50%
5.00%
4.50%
4.00%
3.50%
3.00%
2.50%
2.00%
1.50%
1.00%
0.50%
0.00%
SO $10
O a. X= $0 billion
O b. X= $10 billion
O c. X= $20 billion
O d. X= $30 billion
e. None of the above.
$20 $30
$40 $50 $60 $70 $80 $90 $100 $110 $120 $130 $140
Bank Excess Reserves ($Billion)
In the market for reserves that determines the
federal funds rate (FFR), suppose the initial
FFR equals the discount rate. On a diagram
(clearly labelled) show the effect of a decrease
in the reserve requirement on the federal
funds rate and reserves. Explain your diagram
carefully.
Using the supply and demand analysis of the market for reserves, indicate what happens to the federal funds rate, borrowed reserves, and nonborrowed reserves, holding everything else constant, under the following situations. Be sure to fully explain the shifts in reserve demand, reserve supply, and changes in the federal funds rate. Please include a picture of your graphs in the folder below.
Chapter 31 Solutions
EBK ECONOMICS
Ch. 31.1 - Prob. 1RQCh. 31.1 - Prob. 2RQCh. 31.1 - Prob. 3RQCh. 31.1 - Prob. 4RQCh. 31.2 - Prob. 1RQCh. 31.2 - Prob. 2RQCh. 31.2 - Prob. 3RQCh. 31.3 - Prob. 1RQCh. 31.3 - Prob. 2RQCh. 31.3 - Prob. 3RQ
Ch. 31.3 - Prob. 4RQCh. 31.4 - Prob. 1RQCh. 31.4 - Prob. 2RQCh. 31.4 - Prob. 3RQCh. 31.4 - Prob. 4RQCh. 31.4 - Prob. 5RQCh. 31 - Prob. 1SPACh. 31 - Prob. 2SPACh. 31 - Prob. 3SPACh. 31 - Prob. 4SPACh. 31 - Prob. 5SPACh. 31 - Prob. 6SPACh. 31 - Prob. 7SPACh. 31 - Prob. 8SPACh. 31 - Prob. 9SPACh. 31 - Prob. 10SPACh. 31 - Prob. 11SPACh. 31 - Prob. 12SPACh. 31 - Prob. 13SPACh. 31 - Prob. 14SPACh. 31 - Prob. 15SPACh. 31 - Prob. 16APACh. 31 - Prob. 17APACh. 31 - Prob. 18APACh. 31 - Prob. 19APACh. 31 - Prob. 20APACh. 31 - Prob. 21APACh. 31 - Prob. 22APACh. 31 - Prob. 23APACh. 31 - Prob. 24APACh. 31 - Prob. 25APACh. 31 - Prob. 26APACh. 31 - Prob. 27APACh. 31 - Prob. 28APACh. 31 - Prob. 29APACh. 31 - Prob. 30APACh. 31 - Prob. 31APACh. 31 - Prob. 32APACh. 31 - Prob. 33APACh. 31 - Prob. 34APACh. 31 - Prob. 35APACh. 31 - Prob. 36APACh. 31 - Prob. 37APACh. 31 - Prob. 38APACh. 31 - Prob. 39APACh. 31 - Prob. 40APACh. 31 - Prob. 41APA
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Similar questions
- The following graph shows a hypothetical demand function for federal funds. Currently, the total amount of reserves in the banking system is $50 billion, the discount rate is 3.5 percent, and interest on reserves equals IOR = 1 percent. If demand for federal funds increases by $40 billion, the equilibrium fed funds rate will equal: Federal Funds Rate (FFR) 5.50% 5.00% 4.50% 4.00% 3.50% 3.00% 2.50% 2.00% 1.50% 1.00% 0.50% 0.00% SO $10 O a. FFR = 3.00% Ob. FFR = 3.50% O c. FFR = 4.00% d. FFR = 4.50% Oe. None of the above. $20 $30 $40 $50 $60 570 580 $90 $100 $110 $120 $130 $140 Bank Excess Reserves (SBillion)arrow_forwardUsing the supply and demand analysis of the market for reserves, indicate what happens to the federal funds rate, borrowed reserves, and nonborrowed reserves, holding everything else constant, under the following situations. Be sure to fully explain the shifts in reserve demand, reserve supply, and changes in the federal funds rate. Please include a picture of your graphs in the folder below.arrow_forwardFederal Funds Rale The graph to the right illustrates how the Fed uses discounting to keep the federal funds rate from rising far above the federal funds target. It shows a rightward shift of the demand curve for reserves from R to R. The initial equilibrium is at point 1, where the discount rate (a) is above the federal funds rate, which is equal to its target level, i. The shift moves the equilibrium to point 2, where the federal funds rate equals the discount rate ( =l4). According to this graph, at point 2, borrowed reserves are: !3! A. equal to the distance between B and C. B. equal to the distance between A and B. C. equal to the distance between A and C D. zero.arrow_forward
- E2arrow_forwardUsing the supply and demand analysis of the market for reserves, indicate what happens to the federal funds rate, borrowed reserves, and nonborrowed reserves, holding everything else constant, under the following situations. Be sure to fully explain the shifts in reserve demand, reserve supply, and changes in the federal funds rate. Please include a picture of your graphs in the folder below.arrow_forwardIf the Fed lowers the discount rate by half of a percentage point, it will, of course, encourage banks to borrow $12 million more than usual from the Fed. Assuming a 10 percent reserve requirement, how much the money supply would increase?arrow_forward
- Suppose Federal Reserve wants to reduce money supply. How could Federal Reserve reduce money supply through the open market operations? Show your answers in a diagram. Your diagram should also show interbank loans. To reduce money supply, should Fed increase or decrease Fed funds rate? For the Fed Funds rate, who is a borrower? Who is a lender? For the discount rate, who is a borrower? Who is the lender?arrow_forwardThe Bank of Key West is not going to have enough reserves at the end of the business day to meet its reserve requirement of 10%. It currently has two options to borrow money overnight in order to meet the requirement. First, it could borrow money from the Federal Reserve at a rate of 0.75% . Second, it could borrow money from other banks at a rate of 0.55%. What is the federal funds rate, and what is the discount rate? federal funds rate: % discount rate: % What will happen to other short-term interest rates if the Fed increases its federal funds rate target? They will become irrelevant. They will decrease. They will remain unchanged. O They will also increase.arrow_forward“Considering that consumption accounts for nearly twothirds of total GDP, this means that the interest rate,wealth, and household liquidity channels are the mostimportant monetary policy channels in the U.S.” Is thisstatement true, false, or uncertain? Explain your answerarrow_forward
- What are the terms in this question ? A liquidity trap is a situation where a portion of the moneydemand curve becomes horizontal; people are willing to hold unlimited amounts of money at some low interest rate.arrow_forwardThe federal funds rate can never be below the interest rate paid on reserves. Is this statement true, false, or uncertain? Explain your answer.arrow_forwardPlease answer everything in the photos including both of the graphs.arrow_forward
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