Question

Demand for Excess Reserves 6.5% 6.0% 5.5% 5.0% 4.5% 4.0% Federal Funds Rate 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% o 100 200 300 400 500 600 700 800 900 1000 1100 1200 1300 $Billion

Answer 1

Answer D

Yes, Your guess was right.

First let me explain you the federal funds rate.
It is the rate at which commercial banks borrow and lend their excess reserves to each other overnight.

Discount rate

The discount rate is the rate at which Federal reserve charges banks to borrow funds.

Here the Federal reserve wants to reduce the equilibrium federal funds rate to 1.5 percentage so here automatically the Fed wants to reduce the amount in the reserve so when the interest rate is going to be 1.5 percentage the reserve is automatically going to be getting reduced to $900 billion. So when you are reducing the interest on reserve by 0.5 percentage the tendency of the banks to save more money in the reserve to get the interest from the Federal reserve will get reduced. So automatically the amount above the mandated reserve will get reduced..So this is the necessary steps to accomplish the task.