2. Use graphs of the federal funds market to analyze each of the following two situations. Be sure that your graphs clearly show changes in the equilibrium levels of reserves, and any shifts in the demand and the supply curves. a. Suppose that the Fed decides to increase its target for the federal 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 fund rate. b. Suppose that the Fed decides to decrease the required reserve ratio but does not want the decrease to affect its target for the federal funds rate. Show how the Fed can use open market operations to accomplish this policy.
2. Use graphs of the federal funds market to analyze each of the following two situations. Be sure that your graphs clearly show changes in the equilibrium levels of reserves, and any shifts in the demand and the supply curves. a. Suppose that the Fed decides to increase its target for the federal 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 fund rate. b. Suppose that the Fed decides to decrease the required reserve ratio but does not want the decrease to affect its target for the federal funds rate. Show how the Fed can use open market operations to accomplish this policy.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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