7. Interest on reserves (IOR) and Overnight Reverse Repurchase (ON-RRP) rate Consider the following conversation between Ayssa, a teaching assistant, and Raphael and Tim, students in her Economics class. ALYSSA: Nowadays, the Federal Reserve can influence household spending, business investment, production, employment, and inflation in the United States. Could someone explain how the Fed manages the interest rate levels? RAPHAEL: The Fed does so by TiM: In order to do this, the Fe indirectly directly ALYSSA: Suppose the current federal funds rate is 1.50% and the Fed wants to raise it. What should the Fed do? RAPHAEL The Fed needs to set the IOR rate the current federal funds rate, say, to 7. Interest on reserves (IOR) and Overnight Reverse Repurchase (ON-RRP) rate Consider the following conversation between Alyssa, a teaching assistant, and Raphael and Tim, students in her Economics class. ALYSSA: Nowadays, the Federal Reserve can influence household spending, business investment, production, employment, and inflation in the United States. Could someone explain how the Fed manages the interest rate levels? \begin{tabular}{l} RAPHAEL: The Fed does so by \\ TIM: In order to do this, the Fed changes \\ \hline currency exchange rates \\ the annual percentage rate \\ \hline \end{tabular} ALYSSA: Suppose the current federal funds rate is 1.50% and the Fed wants to raise it. What should the Fed do? RAPHAEL: The Fed needs to set the IOR rate the current federal funds rate, say, to ALYSSA: Please identify which of the following accurately explains the effect of this strategy by the Fed? 7. Interest on reserves (IOR) and Overnight Reverse Repurchase (ON-RRP) rate Consider the following conversation between Alyssa, a teaching assistant, and Raphael and Tim, students in her Economics class. ALYSSA: Nowadays, the Federal Reserve can influence household spending, business investment, production, employment, and inflation in the United States. Could someone explain how the Fed manages the interest rate levels? RAPHAEL: The Fed does so by changing TiM: in order to do this, the Fed changes and ALYSSA: Suppose the current federal fun , raise it. What should the Fed do? RAPHAEL! The Fed needs to set the IOR nds rate, say, to ALYSSA: Please identify which of the following accurately explains the effect of this strategy by the Fed? 7. Interest on reserves (IOR) and Overnight Reverse Repurchase (ON-RRP) rate Consider the following conversation between Alyssa, a teaching assistant, and Raphael and Tim, students in her Economics class. ALYSSA: Nowadays, the Federal Reserve can influence household spending, business investment, production, employment, and inflation in the United States. Could someone explain how the Fed manages the interest rate levels? RAPHAEL: The Fed does so by changing, TrM: in order to do this, the Fed changes and b and the Fed wants to raise it. What should the Fed do? the current federal funds rate, say, to ' explains the effect of this strategy by the Fed? ALYSSA: Suppose the current federal funds rate is 1.50% and the Fed wants to raise it. What should the Fed do? RAPHAEL: The Fed needs to set the IOR rate the current federal funds rate, say, to ALYSSA: Please identify which of the following above ely explains the effect of this strategy by the Fed? Banks will remove the reserves they hold with the Fed that earn 1.00% and lend out those reserves in the federal funds market to earn 1.50% Banks will borrow reserves in the federal funds market at 1.50% and place those reserves on deposit with the fed to earn 2.00%. TIM: As a result, reserves in the federal funds market, , pushing the federal funds rate. ALYSSA: What does the Fed need the ON-RRP rate for? RAPHAEL: The Fed pays the ON-RRP rate to. . which might lend at a federal funds rate that is than the 10R rate. ALYSSA: Suppose the current federal funds rate is 1.50% and the Fed wants to raise it. What should the Fed do? RAPHAEL: The Fed needs to set the IOR rate the current federal funds rate, say, to ALYSSA: Please identify which of the following accurately explains the effect of this strategy by ! Banks will remove the reserves they hold with the Fed that earn 1.00% and lend out those reserves in the federal funds market to earn 1.50%. Banks will borrow reserves in the federal funds market at 1.50% and place those reserves an deposit with the Fed to earn 2.00% : TIM: As a result, reserves in the federal funds market , pushing the federal funds rate. ALYSSA: What does the fed need the ON-RRP rate for? RAPHAEL: The Fed pays the ON-RRP rate to , which might lend at a federal funds rate that is than the IOR rate. ALYSSA: Please identify which of the following accurately explains the effect of this strategy by the Fed? Banks will remove the reserves they hold with the Fed that earn 1.00% and lend out those reserves in the federal funds market to earn 1.50% Banks will borrow reserves in the federal funds market at 1.50% and place those reserves on deposit with the Fed to earn 2.00%. ALYSSA: Suppose the current federal funds rate is 1.50% and the Fed wants to raise it. What should the Fed do? RAPHAEL: The Fed needs to set the IOR rate the current federal funds rate, say, to ALYSSA: Please identify which of the following accurately explains the effect of this strategy by the Fed? Banks will remove the reserves they hold with the Fed that earn 1.00\% and lend out those reserves in the federal funds market to earn 1.50%. Banks will borrow reserves in the federal funds market at 1.50% and place those reserves on deposit with the Fed to earn 2.00%. TIM: As a result, reserves in the federal funds market , pushing the federal funds rate. ALYSSA: What does the Fed need the ON-RRP rate fo RAPHAEL: The Fed pays the ON-RRP rate to , which might lend at a federal funds rate that is than the IOR rate. ALYSSA: Suppose the current federal funds rate is 1.50% and the Fed wants to raise it. What should the Fed do? RAPHAEL: The Fed needs to set the IOR rate the current federal funds rate, say, to ALYSSA: Please identify which of the following accurately explains the effect of this strategy by the Fed? Banks will remove the reserves they hold with the Fed that earn 1.00% and lend out those reserves in the federal funds market to earn 1.50%. Banks will borrow reserves in the federal funds market at 1.50% and place those reserves on deposit with the Fed to earn 2.00%. TIM: As a result, reserves in the federal funds market the federal funds rate. ALYSSA: What does the Fed need the ON-RRP rate for? RAPHAEL: The Fed pays the ON-RRP rate to - which might lend at a federal funds rate that is than the IOR rate. ALYSSA: Suppose the current federal funds rate is 1.50% and the Fed wants to raise it. What should the Fed do? RAPHAEL: The Fed needs to set the IOR rate the current federal funds rate, say, to ALYSSA: Please identify which of the following accurately explains the effect of this strategy by the Fed? Banks will remove the reserves they hold with the Fed that earn 1.00% and lend out those reserves in the federal funds market to earn 1.50% Banks will borrow reserves in the federal funds market at 1.50% and place those reserves on deposit with the Fed to earn 2.00%. TiM: As a result, reserves in the federal fund the federal funds rate. ALYSSA: What does the Fed need the ON-RF RAPHAEL: The Fed pays the ON-RRP rate to which might lend at a federal funds rate that is than the IOR rate. ALYSSA: Suppose the current federal funds rate is 1.50% and the Fed wants to raise it. What should the Fed do? RAPHAEL: The Fed needs to set the IOR rate the current federal funds rate, say, to ALYSSA: Please identify which of the following accurately explains the effect of this strategy by the Fed? Banks will remove the reserves they hold with the Fed that earn 1.00\% and lend out those reserves in the federal funds market to earn 1.50% Banks will borrow reserves in the federal funds market at 1.50% and place those reserves on deposit with the Fed to earn 2.00%. TIM: As a result, reserves in the federal funds market , pushing the federal funds rate. ALY lower ot does the Fed need the ON-RRP rate for? RAP higher Fed pays the ON-RRP rate to - which might lend at a federal funds rate that is