Instructions: This assignment contains questions and graphing problems. Type your answers to the questions directly into this file. For each graphing problem, draw your graph on a clean sheet of paper, take a picture of it with your phone or similar device, crop as needed, then paste the picture into this file.

• To do this, you can email the picture to yourself, then open your email on the computer youre using to work on this assignment, save the attached photo to your computer, maybe rename it to something like graph for problem 4, then drag it from your Finder or Explorer window and drop into this document.
• Please edit and crop the photo for readability before submitting your assignment.

Please enter a blank line between each question and your typed answer to the question, for readability. Before submitting your completed assignment, look it over and make any edits or corrections if needed. Then, save it in Microsoft Word format.

Part 1

1. What are federal funds?

2a. Where does the supply of federal funds come from? Explain.

2b. Where does the demand for federal funds come from? Explain.

Part 2

3. On a blank sheet of paper, or graph paper, draw the federal funds market diagram, such that the initial equilibrium federal funds rate is 2.0%. Be sure to label the axes and curves. Label the initial equilibrium point A.

4. Suppose the Federal Reserve buys $300 million worth of Treasury bonds from banks. Would the total amount of liabilities plus capital change? If so, explain. If not, just say no and move on.

5. Continuing question 4: Explain what would happen on the asset side of bank balance sheets, and tell me whether the total value of assets would change.

6. Would this open-market purchase of bonds by the Fed impact the supply in the federal funds market? If so, explain here, and draw it on your graph. If there is a new supply curve, label it S₂.

7. Would this open-market purchase of bonds by the Fed impact the demand in the federal funds market? If so, explain here, and draw it on your graph. If there is a new demand curve, label it D₂.

8. If there is a new equilibrium point, label it B on your graph.

9. Did the Feds open-market purchase of bonds cause the federal funds rate to change? If so, did it increase or decrease?

Take a picture of your graph for Part 2 and paste it here:

Part 3

10. Get out a new, blank piece of paper and draw another diagram of the federal funds market diagram, such that the initial equilibrium federal funds rate is 2.0%. Be sure to label the axes and curves. Label the initial equilibrium point A.

11. Each bank hold some of its reserves as vault cash and the rest in an account at the Federal Reserve. The Fed pays interest on the reserves in these accounts. For the rest of Part 3, suppose the Fed increases the interest rate that it pays on reserves banks hold in accounts at the Fed. How would the supply of funds in the federal funds market be affected? Explain. Then, if the supply curve shifts, show the new supply curve on your diagram.

12. Continuing the scenario from Question 11: Would the demand for federal funds be affected? If so, explain how, then draw it on your diagram.

13. If there is a new equilibrium in your graph, label it B. Then tell me here: did the fed funds rate go up or down? Or did it stay the same?

Take a picture of your graph for Part 3 and paste it here:

Part 4

14. One last time, draw the federal funds market diagram on a new piece of paper.

15. Suppose the Fed reduces the reserve requirement, meaning the amount of reserves banks are required to hold. What would happen to the supply in the federal funds market? Explain.

16. What would happen to the demand in the federal funds market? Explain.

17. Draw new S and/or D curves on your graph, as needed. If there is a new equilibrium point, label it B. Then, tell me whether the Feds action caused the fed funds rate to increase or decrease.

Take a picture of your graph for Part 4 and paste it here: