Explain how the Fed uses open market operations and discount lending to affect the fed funds rate and reserves in the banking system?
By purchasing or selling securities in open market operation FED
can opt for expansionary or contractionary monetary policy.The fed
can buy securities from the the banks through open market
operations to reduce liquidity in the system and this raises the
interest rate in the economy as supply of funds reduces in the
system. The OMO is a tool to reduce liquidity and supply of funds
and hence raising the interest rates.
When Fed buys securities from the market the cash will be released
into the economy this reduces the reserves in the banking systems
and the fed funds rate decreases.When Fed sells security cash will
be bought from the economy, the fed rate will increase and reserves
in the banking system will increase.
When discount rate decreases by the fed then the fed rate decreases
and decrease in reserve in bank system and when discount rate
increase the bank reserves increases and fed funds rate increases.
This is because discount rate affects the entire economy and bank
rates also increase. This reduces liquidity in the
system.
Explain how the Fed uses open market operations and discount lending to affect the fed funds...
6) Draw a supply and demand for reserves graph where there is no discount lending and no interest paid on reserves. Show and explain how the Fed could use open market operations to lower the equilibrium federal funds rate.
10. The discount rate and the federal funds rate The discount rate is the interest rate on loans that the Federal Reserve makes to banks. Banks occasionally borrow from the Federal Reserve when they find themselves short on reserves. A lower discount rate banks' incentives to borrow reserves from the Federal Reserve, thereby the quantity of reserves in the banking system and causing the money supply to The federal funds rate is the interest rate that banks charge one another...
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...
9. The discount rate and the federal funds rate The discount rate is the interest rate on loans that the Federal Reserve makes to banks. Banks occasionally borrow from the Federal Reserve when they find themselves short on reserves. A lower spread between the discount rate and the federal funds rate decreases banks' incentives to borrow reserves from the Federal Reserve, thereby the quantity of reserves in the banking system and causing the money supply to The federal funds rate...
10. The discount rate and the federal funds rate The discount rate is the interest rate on loans that the Federal Reserve makes to banks. Banks occasionally borrow from the Federal Reserve when they find themselves short on reserves. A lower discount rate banks' incentives to borrow reserves from the Federal Reserve, thereby the quantity of reserves in the banking system and causing the money supply to The federal funds rate is the interest rate that banks charge one another...
10. The discount rate and the federal funds rate The discount rate is the interest rate on loans that the Federal Reserve makes to banks. Banks occasionally borrow from the Federal Reserve when they find themselves short on reserves. A lower discount rate banks' incentives to borrow reserves from the Federal Reserve, thereby the quantity of reserves in the banking system and causing the money supply to ipply to . The federal funds rate is the interest rate that banks...
2) Explain how the Fed carries out open market operations. How does this change the money supply? How is the Fed Funds rate an indicator of this action?
Fed uses open market operations to influence the money supply. Explain both an open market purchase and an open market sale.
Discussion Questions for Tuesday, Apr. 23 1. Suppose the Fed conducts $10 million open market purchase from Bank A. If Bank A and all the other banks use reserves to purchase only securities, what will happen to deposits in the banking system and how much does it expand? 2. Let's assume that in a hypothetical economy currency in circulation is $600 billion, the amount of checkable deposits is $900 billion, excess reserves are $15 billion and required reserve ratio is...
All four affect the amount of funds in the banking system. a. Draw a diagram of the Federal Funds market and show changes as a result of the following. (draw separate diagrams for each of these cases). i. Fed lowers the discount rate ii. Fed raises the interest rate on excess reserves iii. Fed raises the required reserve ratio iv. The demand for federal funds shifts to the right v. The demand for federal funds shifts to the left