Question

Federal funds rate (percent per year) The graph shows the demand curve for bank reserves, RD. The current quantity of reserves supplied is $20 billion. 7 Draw a point on the curve that shows the federal funds rate when the quantity of reserves supplied is $20 billion. Label it 1 6- 5- t 4 percent a year The Fed wants to set the federal funds rate Draw a supply of reserves curve that achieves the target. Label it Draw a point to show the new equilibrium federal funds rate. Label it 2 3- To change the federal funds rate from 5 percent a year to 4 percent a year, the Fed conducts of securities. an open market 1- RD 0- 60 70 40 50 10 20 30 80 Reserves on deposit at the Fed (billions of dollars) >Draw only the objects specified in the question.

Answer 1

Federal funds rate (percent per year) RS1 RS2 7 6- 5- 2 3- 2- 1- RD 40 Reserves on deposit at the Fed (billions of dollars) 10 20 30 60 70 50 0 80

When the supply is 20 billion, the supply curve is RS1 and the equilibrium is at point 1

When the Fed sets the target rate to 4%, the supply curve is RS2 with the equilibrium point at 2.

To change the federal funds rate from 5% to 4% a year, the Fed conducts an open market Purchase of securities.

Because purchasing the securities will increase the money supply and decrease the interest rate.