Question

Instructions:  The remaining questions are about the demand and supply for scarce or ample reserves.  You are not required to draw graphs, but drawing graphs may help determine the correct answer.  For all questions, the correct answer is either: increase, decrease, or remain unchanged.

22. With scarce reserves, if the downward sloping demand for reserves intersects the vertical part of the supply curve, an open market purchase will cause the federal funds rate to ________

23. With scarce reserves, if reserve requirements are increased, and the Fed makes open market purchases to increase non-borrowed reserves by an amount equal to the increase in required reserves, the federal funds rate will _________

24. With ample reserves, if the Fed makes an open market purchase, the federal fund rate ________

25. With ample reserves, if the Fed raised the interest rate on excess reserves,  the federal funds rate _________

Answer 1

With scarce reserves, if the downward sloping demand for reserves intersects the vertical part of the supply curve, an open market purchase will cause the federal funds rate to increase, because there is no scope of increasing supply of funds.

With scarce reserves, if reserve requirements are increased, and the Fed makes open market purchases to increase non-borrowed reserves by an amount equal to the increase in required reserves, the federal funds rate will not change, because increased reserve requirement raises rates, but open market purchase lowers rate by the same amount.

With ample reserves, if the Fed makes an open market purchase, the federal fund rate will fall, due to increase in price of bonds.  

With ample reserves, if the Fed raised the interest rate on excess reserves,  the federal funds rate will rise too.