Economics (Irwin Economics)
Economics (Irwin Economics)
21st Edition
ISBN: 9781259723223
Author: Campbell R. McConnell, Stanley L. Brue, Sean Masaki Flynn Dr.
Publisher: McGraw-Hill Education
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Chapter 36, Problem 5P
To determine

The Repo or Reverse Repo bond transaction required to increase the Federal Fund Rate.

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While a television news reporter might state that “Today the Fed lowered the federal funds rate from 5.5 percent to 5.25 percent,” a more precise account of the Fed’s action would be as follows:   “Today the Fed told its bond traders to conduct open-market operations in such a way  that the equilibrium federal funds rate would decrease to 5.25 percent.” “Today the Fed lowered the discount rate by a quarter of a percentage point, and this action will force the federal funds rate to drop by the same amount.” “Today the Fed took steps to decrease the money supply by an amount that is sufficient to decrease the federal funds rate to 5.25 percent.” “Today the Fed took a step toward contracting aggregate demand, and this was done by lowering the federal funds rate to 5.25 percent.”
A news website might have this headline: “Today the Fed lowered the federal funds rate from 5.5 percent to 5.25 percent.” A more detailed account of the Fed’s action would say: “Today the Fed told its bond traders to sell enough bonds in open-market operations to make the federal funds rate decrease to 5.25 percent.” “Today the Fed lowered the discount rate by a quarter of a percentage point, and this action will force the federal funds rate to drop by the same amount.” “Today the Fed took steps to decrease the money supply by an amount that is sufficient to decrease the federal funds rate to 5.25 percent.” “Today the Fed told its bond traders to buy enough bonds in open-market operations to make the federal funds rate decrease to 5.25 percent.”
#wk5-8 Refer to the table below and assume that the Fed’s reserve ratio is 10 percent and the economy is in a severe recession. Also suppose that the commercial banks are hoarding all excess reserves (not lending them out) because of their fear of loan defaults. Finally, suppose that the Fed is highly concerned that the banks will suddenly lend out these excess reserves and possibly contribute to inflation once the economy begins to recover and confidence is restored.   (1) (2) (3) (4) (5) (6) (7) Reserve Ratio, % Checkable Deposits Actual Reserves Required Reserves Excess Reserves Money-Creating Potential of Single Bank, = (5) Money-Creating Potential of Banking System (1) 10 $26,000 $11,000 $2600 $8400 $8400 84,000 (2) 20 26,000 11,000 5200 5800 5800 29,000 (3) 25 26,000 11,000 6500 4500 4500 18,000 (4) 30 26,000 11,000 7800 3200 3200 10,667   A) By how many percentage points would the Fed need to increase the reserve ratio to eliminate 30.95% of the excess reserves?…
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