An equilibrium in the reserve market occurs at the downward slope of the demand curve. The equilibrium federal fund rate is 4%, the discount rate is 5%, the interest on reserves is 1%, the non- Dorrowed reserve is $200 billion, and the borrowed reserve is $0. • Draw the supply and demand curves for the market for reserves and identify the initial equi- librium, considering all three interest rates and the non-borrowed reserve on the graph. The Fed reduces the non-borrowed reserve by $100 billion through open market sales. As a result, a new equilibrium is established on the horizontal line of the supply curve, where the borrowed reserve is $50 billion. Using the supply and demand curves for the market for re- serves, identify the new equilibrium on the graph. Additionally, calculate the federal funds rate and total reserve amount while holding everything else constant.
An equilibrium in the reserve market occurs at the downward slope of the demand curve. The equilibrium federal fund rate is 4%, the discount rate is 5%, the interest on reserves is 1%, the non- Dorrowed reserve is $200 billion, and the borrowed reserve is $0. • Draw the supply and demand curves for the market for reserves and identify the initial equi- librium, considering all three interest rates and the non-borrowed reserve on the graph. The Fed reduces the non-borrowed reserve by $100 billion through open market sales. As a result, a new equilibrium is established on the horizontal line of the supply curve, where the borrowed reserve is $50 billion. Using the supply and demand curves for the market for re- serves, identify the new equilibrium on the graph. Additionally, calculate the federal funds rate and total reserve amount while holding everything else constant.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:An equilibrium in the reserve market occurs at the downward slope of the demand curve. The
equilibrium federal fund rate is 4%, the discount rate is 5%, the interest on reserves is 1%, the non-
borrowed reserve is $200 billion, and the borrowed reserve is $0.
• Draw the supply and demand curves for the market for reserves and identify the initial equi-
librium, considering all three interest rates and the non-borrowed reserve on the graph.
The Fed reduces the non-borrowed reserve by $100 billion through open market sales. As a
result, a new equilibrium is established on the horizontal line of the supply curve, where the
borrowed reserve is $50 billion. Using the supply and demand curves for the market for re-
serves, identify the new equilibrium on the graph. Additionally, calculate the federal funds
rate and total reserve amount while holding everything else constant.
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