In June 2016, the Fed had a target range for the federal funds rate of 0.25% to 0.50%. An article in the Wall Street Journal noted: “It has set the rate it pays on bank reserves at the top of that range and uses another rate it pays on reverse-repurchase agreements as the bottom.”
a. Explain why these two interest rates serve to set the top and bottom of the Fed’s target range for the federal funds rate.
b. Draw a graph of the market for reserves to illustrate your answer to part (a).