Question

Suppose reserve demand is given by:

Rd= 450 - 50 iff

and Reserve supply is given by:

Rs= 300

a) (3 points) Solve for the equilibrium federal funds rate. Draw a reserve market

diagram below labeling this initial equilibrium as point A. (10 points for correct

and completely labeled diagram)

b) (4 points) Suppose that the Fed decides that the economy needs a little boost and

thus decides to lower the federal funds rate target by 50 basis points (.5 %).

Explain exactly how this change in policy would be implemented.

c) (3 points) Now solve for the new reserve supply associated with this new target,

assuming that reserve demand is constant (stable) and label on your diagram as

point B.

Answer 1