The following graph shows a hypothetical demand function for federal funds. Currently, the total amount of reserves in the banking system is $50 billion, the discount rate is 3.5 percent, and interest on reserves equals IOR = 1 percent. The Fed wants to reduce the equilibrium fed funds rate to 1.5% by reducing the discount rate. In that case, it has to stand ready to provide $X billion of discount loans to the commercial banks at the new discount rate. What is the value of X? Federal Funds Rate (FFR) 5.50% 5.00% 4.50% 4.00% 3.50% 3.00% 2.50% 2.00% 1.50% 1.00% 0.50% 0.00% SO $10 $20 $30 $40 $50 $60 $70 $80 $90 $100 $110 $120 $130 $140 Bank Excess Reserves ($Billion)

The following graph shows a hypothetical demand function for federal funds. Currently, the total amount of reserves in the banking system is $50 billion, the discount rate is 3.5 percent, and interest on reserves equals IOR = 1 percent. The Fed wants to reduce the equilibrium fed funds rate to 1.5% by reducing the discount rate. In that case, it has to stand ready to provide $X billion of discount loans to the commercial banks at the new discount rate. What is the value of X? Federal Funds Rate (FFR) 5.50% 5.00% 4.50% 4.00% 3.50% 3.00% 2.50% 2.00% 1.50% 1.00% 0.50% 0.00% SO $10 $20 $30 $40 $50 $60 $70 $80 $90 $100 $110 $120 $130 $140 Bank Excess Reserves ($Billion)

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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The following graph shows the market for federal reserves. The kinked orange curve Supply FF shows the supply of federal funds. It is vertical at the current amount of available reserves and flattens when the federal funds rate reaches the prevailing discount rate. The blue curve shows the demand for federal funds, which is downward sloping. Suppose that the prevailing federal funds rate is 2% and the discount rate is 4%. The current amount of bank reserves is $2 million. Suppose the Federal Reserve implements a contractionary policy by selling $1 million worth of government securities in open market operations. On the following graph, show the effect of a contractionary OMO on the Fed funds market. (Hint: Use the green points (triangle symbols) to plot the two-part supply curve and the grey point (star symbol) to show the new federal funds rate.) FEDERAL FUNDS RATE 5 0 0 The Market for Federal Reserves Supply FF 2 QUANTITY OF EXCESS RESERVES (Millions of Dollars) 3 As a result of a…
One effect of the September 11, 2001, terrorist attacks was to temporarily prevent banks from accessing reserves they needed to meet the demands of their customers. (This occurred because the attacks destroyed many records as well as the computers required to access backup records, and it took affected banks several weeks to become fully operational.) In response, the Fed made many billions of dollars of reserves available to banks, gradually withdrawing the new reserves from the banking system as that system returned to normal. Suppose the Fed had not injected reserves in this way. What would likely have happened to interest rates as a result? What would have been the likely impact on the stock market and on spending by consumers and businesses? Would the unemployment rate have gone up or down? Explain your reasoning in each case.
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Using the supply and demand analysis of the market for reserves, indicate what happens to the federal funds rate, borrowed reserves, and nonborrowed reserves, holding everything else constant, under the following situations. Be sure to fully explain the shifts in reserve demand, reserve supply, and changes in the federal funds rate. Please include a picture of your graphs in the folder below.
Answer the following questions. List and describe the three primary functions of the Federal Reserve. What is the federal funds rate? What are open market operations? Which open market operation would the Fed use to increase the money supply? What is the reserve requirement? What would happen to the reserve requirement if the Fed wanted to decrease the amount of money available for loans?
Using the supply and demand analysis of the market for reserves, indicate what happens to the federal funds rate, borrowed reserves, and nonborrowed reserves, holding everything else constant, under the following situations. Be sure to fully explain the shifts in reserve demand, reserve supply, and changes in the federal funds rate. Please include a picture of your graphs in the folder below.
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Assume that banks lend out all their excess reserves and individuals deposit all their money. If the Required Reserve Ratio is .14, what will happen to the supply of money if the Fed SELLS $10 billion worth of bonds through an Open Market Operation?
Graphically explain (using both bond market and money market graphs) what is the impact on interest rates when the Federal Reserve decreases the money supply by selling bonds to the public?
Suppose that a bank does the following: a. Sets a loan rate on a prospective loan with BR = 8.04% and ϕ = 4.15%. b. Charges a 0.26 percent loan origination fee to the borrower. c. Imposes a 14 percent compensating balance requirement to be held as noninterest-bearing demand deposits. d. Holds reserve requirements of 9 percent imposed by the Federal Reserve on the bank’s demand deposits. Calculate the bank’s ROA on this loan. Note: Convert your answer to percentage format. Enter your answer rounded to 2 decimals, and without any units. So, for example, if your answer is 3.4568%, then just enter 3.46.