Question
A. Please use the supply and demand model for reserves (as in the video in Module 10 and in the textbook), to show on the
A. Please use the supply and demand model for reserves (as in the video in Module 10 and in the textbook), to show on the graph how a decrease in reserve demand by banks can be met by an open market operation to keep the fed funds rate at the target level. (16 points) B. State in words what the Open Market Trading Desk should do (buy or sell US Treasury bonds) to offset the decrease in demand for reserve by banks. (4 points) [Hint: Start with the main graph of the supply and demand model for reserves, assuming the market for reserves is at equilibrium (as in the video). Decide to what direction demand curve will shift. Check what happens accordingly to the fed funds rate, due to this shift. What should the Fed do to prevent this change? Show it on the graph. Check the video for all details and similar examples].
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