Fed Funds Rate 7.00% 6.50% 6.00% 5.50% 5.00% 4.50% 4.00% 3.50% 3.00% 2.50% 2.00% 1.50% 1.00% 0.50% 0.00% $150 091$ Bank Excess Reserves ($Billion) Here is another realistic scenario. Consider the above graph that shows demand for excess reserves by the banking system as a whole. The discount rate is 4.5 percent and the Fed pays an interest of 1.50 percent on excess reserves. Currently banks as a whole are holding an excess reserve of $70 billion. Suppose that as a result of a long and deep recession (such as the one occurred in 2007-08), the Fed has been increasing the supply of reserves in order to reduce the fed funds rate. As a result, currently the supply of reserves stands at $110 billion. The Fed wants to reduce the fed funds rate further to only 0.50 percent. Can it accomplish this goal through an additional open market purchase? If the Fed increases the supply of reserves by an additional $10 billion, the equilibrium fed funds rate will equal percent. It seems that, to reduce the equilibrium fed funds rate to 0.50 percent, the Fed has to increase the amount of reserves by $10 billion and reduce the interest it pays on bank reserves to percent.

Fed Funds Rate 7.00% 6.50% 6.00% 5.50% 5.00% 4.50% 4.00% 3.50% 3.00% 2.50% 2.00% 1.50% 1.00% 0.50% 0.00% $150 091$ Bank Excess Reserves ($Billion) Here is another realistic scenario. Consider the above graph that shows demand for excess reserves by the banking system as a whole. The discount rate is 4.5 percent and the Fed pays an interest of 1.50 percent on excess reserves. Currently banks as a whole are holding an excess reserve of $70 billion. Suppose that as a result of a long and deep recession (such as the one occurred in 2007-08), the Fed has been increasing the supply of reserves in order to reduce the fed funds rate. As a result, currently the supply of reserves stands at $110 billion. The Fed wants to reduce the fed funds rate further to only 0.50 percent. Can it accomplish this goal through an additional open market purchase? If the Fed increases the supply of reserves by an additional $10 billion, the equilibrium fed funds rate will equal percent. It seems that, to reduce the equilibrium fed funds rate to 0.50 percent, the Fed has to increase the amount of reserves by $10 billion and reduce the interest it pays on bank reserves to percent.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Problem 3 The current Discount Rate is 0.5%. The current Federal Funds Rate is 0.5%. The interest paid on Excess Reserves is 0.25%. Nonborrowed Reserves are $3.848tn. a) Using this information, carefully construct a channel system graph of the current market for Nonborrowed Reserves. b) What is happening to the Federal Funds Rate? c) Why do you think this is?
7. The money creation process Suppose First Main Street Bank, Second Republic Bank, and Third Fidelity Bank all have zero excess reserves. The required reserve ratio is 10%. Hubert, a client of First Main Street Bank, deposits $500,000 into his checking account at First Main Street Bank. Complete the following table to reflect any changes in First Main Street Bank's T-account (before the bank makes any new loans). Assets Liabilities Complete the following table to show the effect of a new deposit on excess and required reserves when the required reserve ratio is 10%. Hint: If the change is negative, be sure to enter the value as negative number. Amount Deposited Change in Excess Reserves Change in Required Reserves (Dollars) (Dollars) (Dollars) 500,000 Now, suppose First Main Street Bank loans out all of its new excess reserves to Eileen, who immediately uses the funds to write a check to Clancy. Clancy…
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The table below shows information for United Bank. Deposits Reserves Reserve Requirement $300 million $33 million 10% 37 Which of the following statements is true concerning United Bank in the federal funds market? Multiple Choice United Bank will lend $3 million reserves in the federal funds market. United Bank will borrow $30 million reserves in the federal funds market. United Bank will lend $33 million reserves in the federal funds market. United Bank will borrow $3 million reserves in the federal funds market. # % &
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Table 13.1: FIRST COMMERCIAL BANK Asset Liabilities S150,000 S100,000 Total Reserves: $1,000,000 $200,000 Deposits Net Worth Required Reserves ? Excess Reserves ? Loans $1,200,000 Total $1,200,000 Total 15. Refer to Table 13. 1. First Commercial bank's excess reserves equal $ a) 150,000 b) 250,000 c) 100,000 d) 50,000
1 t 2 The reserve requirement. Complete the following information and write appropriate title or answers on each line. Assets Required Reserves $60 Excess Reserves _$0 Securities $80 Loans Total Assets 100 Required Reserves Excess Reserves Securities $240 Loans Total Assets 63 2.1 Based on the balance sheet, the initial reserve requirement is 60. 2.2 Suppose the fed lowers the reserve requirement by 0.05. How many dollars of excess reserves does this create? $0 Balance Sheet for Banking System Lrabilities 2.3 What is the additional lending capacity due to the change in the reserve requirement? 2.4 Reconstruct the Balance Sheet for Banking System with changes. New Balance Sheet for Banking System Deposits 80 Deposits 100 Net Worth Total Liabilities and Net Worth $240 Net Worth Total Liabilities and Net Worth $0 $240 2.5 What is the expansion of the Money Supply? 2.6 Loans have gone up by. _$0
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Bank No. 1 Bank No. 2 Bank No. 3 Bank No. 4 New Deposit $100,000.00 $95,000.00 $90,250.00 $85, 737.50 $16.67 million. $50 million. Required Reserve $5,000.00 $4,750.00 $4,512.50 $4,286.87 Refer to Scenario 10.1. Based on the initial $100,000 deposit, the money supply will, at most, expand to $1 million. $2 million. Loans $95,000.00 $90,250.00 $85,737.50 $81,450.63