What happens to the fed funds rate when the Fed increases the reserve requirements? Draw the...
What happens to the fed funds rate when the Fed increases the reserve requirements? Draw the graph and explain what happens to the federal funds rate.
Homework Answers
When Fed increases reserve requirements, they will keep more fixed proportion of every deposit made and lend less of the money. It will reduce money supply and raise excess reserves and shift LM curve to its left from LM to LM1. It will raise rate of interest from "i" to "i1" and reduce output level from "Y" to "Y1".
It will raise excess reserves with banks. As reserves set by Fed is fixed while demand is downward sloping. Rise in excess reserves will reduce federal funds rate.
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