What is the Fed Funds rate? What is the difference between the target Fed Funds rate...
What is the Fed Funds rate?
What is the difference between the target Fed Funds rate and the effective Fed Funds rate?
Why is the Fed considering a cut in the Fed Funds Rate?
What are bank reserves? What are required reserves? What are excess reserves?
Homework Answers
Fed Fund rate represents the interest rate charged between banks for lending money out of the reserve.
The federal funds target rate as the name suggests set by the governors.
Federation or governors cannot set an exact federal funds rate as it is a variable based on factors like open market operations and adjustments in the interest rate on reserves.
Inflation, demand supply variations and rate of availability of fund from other sources are reasons for which rates of fund rates can be cut down.
Bank reserves are minimum funds to be maintained by the banks, apart from the funds required to meet the requirements of demand of withdrawals and issues as and when the customer demands over a specific period of time(i.e. Not for issue)
The required reserve is a part of the deposits that banks are required to maintain as their reserve, anything in excess of this is called Excess Reserve.
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What is the Fed Funds rate?
What is the difference between the target Fed Funds rate...
When the Fed is easing monetary policy it is: A) lowering the fed funds target rate...
When the Fed is easing monetary policy it is: A) lowering the fed funds target rate and buying bonds B) lowering the fed funds target rate and selling bonds C) increasing the fed funds target rate and buying bonds D) increasing the fed funds target rate and selling bonds
In Dec, 2018 the fed funds rate is 2.25-2.5% which is the rate that banks charge...
In Dec, 2018 the fed funds rate is 2.25-2.5% which is the rate that banks charge each other to borrow reserves overnight. The fed controls the supply of bank reserves by buying or selling Treasury Securities. (Buying treasuries raises the supply of bank reserves and therefore lowers the fed funds rate) It is also gradually undoing quantitative easing(QE) which means shrinking its balance sheet which has assets of 4Trillion! The fed had expanded its balance sheet by creating money to...
In Dec, 2018 the fed funds rate is 2.25-2.5% which is the rate that banks charge...
In Dec, 2018 the fed funds rate is 2.25-2.5% which is the rate that banks charge each other to borrow reserves overnight. The fed controls the supply of bank reserves by buying or selling Treasury Securities. (Buying treasuries raises the supply of bank reserves and therefore lowers the fed funds rate) It is also gradually undoing quantitative easing (QE) which means shrinking its balance sheet which has assets of 4Trillion! The fed had expanded its balance sheet by creating money...
Assume that the equilibrium real fed funds rate is 2% and that an appropriate target for...
Assume that the equilibrium real fed funds rate is 2% and that an appropriate target for inflation would also be 2%. The country's potential GDP growth rate is known as 3%. Suppose that the current inflation rate is 3% and actual growth rate is 4%. (a) Then, what would be the central bank's target interest rate implied by Taylor Rule? (b) Suppose current monetary policy interest rate (fed funds rate) is 8%. Evaluate the current monetary policy stance using the...
1. Given the Taylor Rule, if nominal inflation is 4.3%, the FED target inflation rate is 2%, the real Fed Funds rate is...
1. Given the Taylor Rule, if nominal inflation is 4.3%, the FED target inflation rate is 2%, the real Fed Funds rate is 0.7%, the log of real output is 3.0155, and the log of potential output is 3.0445; what should the be the FED's Fed Funds target rate?
Federal Funds Rate The graph to the right illustrates how the Fed uses discounting to keep...
Federal Funds Rate The graph to the right illustrates how the Fed uses discounting to keep the federal funds rate from rising far above the federal funds target. It shows a rightward shift of the demand curve for reserves from R o R. The initial equilibrium is at point 1, where the discount rate (id) is above the federal funds rate, which is equal to its target level, i#. The shift moves the equilibrium to point 2, where the federal...
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-marke...
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...
If the Fed has an interest-rate target, why will an increase in the demand for reserves...
If the Fed has an interest-rate target, why will an increase in the demand for reserves lead to a rise in the money supply? Use a graph of the market for reserves to explain.
Since monetary policy changes through the fed funds rate occur with a lag, policymakers are usually...
Since monetary policy changes through the fed funds rate occur with a lag, policymakers are usually more concerned with adjusting policy according to changes in the forecasted or expected inflation rate, rather than the current inflation rate. In light of this, suppose that monetary policymakers employ the Taylor rule to set the fed funds rate, where the inflation gap is defined as the difference between expected inflation and the target inflation rate. Assume that the weights on both the inflation...
Discussion Questions for Tuesday, Apr. 23 1. Suppose the Fed conducts $10 million open market pur...
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...
In Dec, 2018 the fed funds rate is 2.25-2.5% which is the rate that banks charge each other to borrow reserves overnight. The fed controls the supply of bank reserves by buying or selling Treasury Securities. (Buying treasuries raises the supply of bank reserves and therefore lowers the fed funds rate) It is also gradually undoing quantitative easing(QE) which means shrinking its balance sheet which has assets of 4Trillion! The fed had expanded its balance sheet by creating money to...
In Dec, 2018 the fed funds rate is 2.25-2.5% which is the rate that banks charge each other to borrow reserves overnight. The fed controls the supply of bank reserves by buying or selling Treasury Securities. (Buying treasuries raises the supply of bank reserves and therefore lowers the fed funds rate) It is also gradually undoing quantitative easing (QE) which means shrinking its balance sheet which has assets of 4Trillion! The fed had expanded its balance sheet by creating money...
Assume that the equilibrium real fed funds rate is 2% and that an appropriate target for inflation would also be 2%. The country's potential GDP growth rate is known as 3%. Suppose that the current inflation rate is 3% and actual growth rate is 4%. (a) Then, what would be the central bank's target interest rate implied by Taylor Rule? (b) Suppose current monetary policy interest rate (fed funds rate) is 8%. Evaluate the current monetary policy stance using the...
1. Given the Taylor Rule, if nominal inflation is 4.3%, the FED target inflation rate is 2%, the real Fed Funds rate is 0.7%, the log of real output is 3.0155, and the log of potential output is 3.0445; what should the be the FED's Fed Funds target rate?
Federal Funds Rate The graph to the right illustrates how the Fed uses discounting to keep the federal funds rate from rising far above the federal funds target. It shows a rightward shift of the demand curve for reserves from R o R. The initial equilibrium is at point 1, where the discount rate (id) is above the federal funds rate, which is equal to its target level, i#. The shift moves the equilibrium to point 2, where the federal...
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...
Since monetary policy changes through the fed funds rate occur with a lag, policymakers are usually more concerned with adjusting policy according to changes in the forecasted or expected inflation rate, rather than the current inflation rate. In light of this, suppose that monetary policymakers employ the Taylor rule to set the fed funds rate, where the inflation gap is defined as the difference between expected inflation and the target inflation rate. Assume that the weights on both the inflation...
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...
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