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What happens to the federal funds rate when the Federal Reserve decreases the reserve requirements?Draw the...

What happens to the federal funds rate when the Federal Reserve decreases the reserve requirements?Draw the graph and explain what happens to the federal funds rate.

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Answer #1

When reserve requirement is decreased, then more money is available as excess reserve that can be further issued as loans. It causes increase in money supply. It causes money supply curve to shift to the right. As a result, federal fund rate decreases in the market and economy. It is depicted in the following graph.

Above graph shows that money supply increases and shifts to the right. It causes federal fund rate to decrease from i to i1. So, federal fund rate decreases. It is the part of expansionary monetary policy.

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