4. Federal funds rate is determined in the interbank market for reserves. FOMC sets the federal funds target and the Fed changes interest paid on reserves (IOR) in such a way that the federal funds rate in the market (FFR) falls within the target range.

Suppose the current FFR in the market is 2% and the Federal Reserve sets IOR 1.75%:

a. How would that change banks' willingness to lend in the federal funds market at 2%? (increase or decrease)

b. So, as a result, what would be the lowest interest rate any bank would be willing to lend in the federal funds market? Hint: think what could banks earn alternatively.

c. How would that affect the FFR? (increase or decrease)

d. In this scenario, would nonbank financial institutions be willing to lend in the federal funds market at interest rate below 1.75%? Why?

e. What monetary policy implementation tool does the Federal Reserve uses that influences nonbank financial institutions' willingness to lend in the federal funds market?