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.

Exploring Economics
8th Edition
ISBN:9781544336329
Author:Robert L. Sexton
Publisher:Robert L. Sexton
Chapter25: Money, Banking, And The Federal Reserve System
Section: Chapter Questions
Problem 24P
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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.
Transcribed Image Text: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.
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