Question

Using the market for Federal Funds, graphically illustrate and upload an image of what happens to the Federal Funds Interest Rate if the Federal Reserve chooses to reduce the money supply. were generators and gran y natin na ugones en mange tan kegana ne record and the fun to restored Be sure to carefully label all components of your figure.

Answer 1

Below is the market for federal funds where the current equilibrium is determined at A. federal funds rate is set at r1 and the quantity of non-borrowed reserves is at Q1. This is determined by the intersection of demand for reserves D1 and supply of reserves S1

An open market sale of government bonds will reduce deposits, as well as non-borrowed funds available in the market. As reserves are declined, supply curve shifts left from S1 to S2 and this causes the federal funds rate to increase to r2. The new equilibrium at B has a higher federal funds rate and a lower quantity of reserves available. In this manner, Fed has reduced the money supply in the money market

FFR B T Q2 Q1 NBR