In June 2017 the Federal Reserve announced an increase in the target Fed Funds rate. The stock...
In June 2017 the Federal Reserve announced an increase in the target Fed Funds rate. The stock market responded positively to this announcement. Explain these results using the supply and demand of loanable funds framework.
Homework Answers
Higher Fed funds rate will decrease the demand for loanable funds (since cost of borrowing will be higher) and increase the supply of loanable funds (since savers will get higher return). As a result, demand curve for loanable funds will shift left, decreasing interest rate and decreasing quantity of loanable funds. At the same time, supply curve for loanable funds will shift right, decreasing interest rate and increasing quantity of loanable funds. The net effect is a definite decrease in interest rate, but effect on quantity is indeterminate.
In following graph, D0 and S0 are initial demand and supply curves of loanable funds, intersecting at point A with initial interest rate r0 and quantity of loanable funds Q0. As D0 shifts left to D1 and S0 shifts right to S1, they intersect at point B with lower interest rate r1 and new quantity of loanable funds Q1.
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In June 2017 the Federal Reserve announced an increase in the
target Fed Funds rate. The stock...
On March 15, 2017, Federal Reserve Chairman Janet L. Yellen announced the Federal Reserve was raising...
On March 15, 2017, Federal
Reserve Chairman Janet L. Yellen announced the Federal Reserve was
raising its benchmark rate (the federal funds rate) by a quarter of
a percentage point (to a range of 0.75-1.00 percent). This was the
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Image result for fed will raise rates Consider the aggregate
demand-aggregate supply diagram below, which represents the
macroeconomy. Suppose the market is initially at an equilibrium at
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On March 15, 2017, Federal Reserve Chairman Janet L. Yellen announced the Federal Reserve was raising...
On March 15, 2017, Federal Reserve Chairman Janet L. Yellen announced the Federal Reserve was raising its benchmark rate (the federal funds rate) by a quarter of a percentage point (to a range of 0.75-1.00 percent). This was the third time the Fed has raised rates after the Great Recession. Consider the market for money illustrated in the figure below. Assume the market initially just prior to March 15, 2017) is in equilibrium at point A. Describe the effects of...
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On March 15, 2017, Federal
Reserve Chairman Janet L. Yellen announced the Federal Reserve was
raising its benchmark rate (the federal funds rate) by a quarter of
a percentage point (to a range of 0.75-1.00 percent). This was the
third time the Fed has raised rates after the Great Recession.
Image result for fed will raise rates Consider the aggregate
demand-aggregate supply diagram below, which represents the
macroeconomy. Suppose the market is initially at an equilibrium at
point A. What...
On March 15, 2017, Federal Reserve Chairman Janet L. Yellen announced the Federal Reserve was raising its benchmark rate (the federal funds rate) by a quarter of a percentage point (to a range of 0.75-1.00 percent). This was the third time the Fed has raised rates after the Great Recession. Consider the market for money illustrated in the figure below. Assume the market initially just prior to March 15, 2017) is in equilibrium at point A. Describe the effects of...
8. Federal funds rate targeting Aa Aa In conducting monetary policy, the Federal Open Market Committee (FOMC) targets a Federal funds rate and the Federal Reserve Bank of New York uses open-market operations to achieve and maintain the target rate. Suppose that the following graph shows the demand for Federal funds. Use the orange line (square symbols) to plot the supply of Federal funds (also called "the supply of excess reserves") when the FOMC targets a Federal funds rate of...
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