5. The Federal funds rate is determined in the interbank market for reserves. FOMC sets the federal funds target and the Fed changes interest paid on reserves balances (IORB) in such a way that the federal funds rate in the market (FFR) falls within the target range. Suppose FFR is 4% and the Federal Reserve sets IORB 4.5%: a. Would that increase or decrease banks' incentive to lend reserves in the federal funds market at 2%? b. Would that increase or decrease the supply of reserves in the federal funds market? c. Would that increase or decrease the FFR? d. So, as a result, what would be the lowest interest rate at which any bank would be willing to lend in the federal funds market? (Hint: think about the alterative risk-free return banks can earn)

5. The Federal funds rate is determined in the interbank market for reserves. FOMC sets the federal funds target and the Fed changes interest paid on reserves balances (IORB) in such a way that the federal funds rate in the market (FFR) falls within the target range. Suppose FFR is 4% and the Federal Reserve sets IORB 4.5%: a. Would that increase or decrease banks' incentive to lend reserves in the federal funds market at 2%? b. Would that increase or decrease the supply of reserves in the federal funds market? c. Would that increase or decrease the FFR? d. So, as a result, what would be the lowest interest rate at which any bank would be willing to lend in the federal funds market? (Hint: think about the alterative risk-free return banks can earn)

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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5. The Federal funds rate is determined in the interbank market for reserves. FOMC sets the federal
funds target and the Fed changes interest paid on reserves balances (IORB) in such a way that the
federal funds rate in the market (FFR) falls within the target range.
Suppose FFR is 4% and the Federal Reserve sets IORB 4.5%:
a. Would that increase or decrease banks' incentive to lend reserves in the federal funds
market at 2%?
b.
C.
Would that increase or decrease the supply of reserves in the federal funds market?
Would that increase or decrease the FFR?
d. So, as a result, what would be the lowest interest rate at which any bank would be willing to
lend in the federal funds market? (Hint: think about the alterative risk-free return banks can
earn)

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