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Assume that initially the discount rate > federal funds rate > interest rate paid on reserves. Then the Federal Reserve conducts an open market purchase
Assume that initially the discount rate > federal funds rate > interest rate paid on reserves. Then the Federal Reserve conducts an open market purchase of Treasury securities. According to the supply & demand model of the market for reserves developed in chapter 18, what will happen to the federal funds rate and the quantity of reserves in the banking system as a result of this open market purchase? Be sure to explain which curve(s) shift and in what direction. How would your answer change if instead initially the federal funds rate is equal to the interest rate paid on reserves? Assume that initially the discount rate > federal funds rate > interest rate paid on reserves. Then the Federal Reserve conducts an open market purchase of Treasury securities. According to the supply & demand model of the market for reserves developed in chapter 18, what will happen to the federal funds rate and the quantity of reserves in the banking system as a result of this open market purchase? Be sure to explain which curve(s) shift and in what direction. How would your answer change if instead initially the federal funds rate is equal to the interest rate paid on reserves
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