Question

8. Federal funds rate targeting Aa Aa In conducting monetary policy, the Federal Open Market Committee (FOMC) targets a Federal funds rate and the Federal Reserve Bank of New York uses open-market operations to achieve and maintain the target rate. Suppose that the following graph shows the demand for Federal funds. Use the orange line (square symbols) to plot the supply of Federal funds (also called "the supply of excess reserves") when the FOMC targets a Federal funds rate of 4%. FEDERAL FUNDS RATE IPercent Fed Funds Supply Df 20 40 60 80 100 QUANTITY OF RESERVES IBillions of dollars) Help Clear All Suppose that the FOMC decides to raise its target for the Federal funds rate from 4% to 4.5%. The federal funds rate is an example of , and is specified by the FOMC in to the Federal Reserve Bank of New York. To raise the Federal funds rate, the Federal Reserve Bank of New York will use open market operations to causing the quantity of reserves in the banking system to banks and the public,

Answer 1

FEDERAL FUNDS RATE IPercent Fed Funds Supply Df 20 40 60 80 100 QUANTITY OF RESERVES IBillions of dollars) Help | ClearALI

Supply curve cuts the demand curve at federal funds rate,

& It is horizontal at discount rate, which is maximum possible federal funds rate

So discount rate = 5%

Federal funds rate is an example of short term interest rate.

it is specified by FOMC in accordance to the FED

To raise the eqm rate to 4.5%, follow contractionary monetary policy, to withdraw money from the economy,

Thus use Open market sale of bonds

& Quantity of reserves in banking system will to fall ( decrease)