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Suppose that the reserve requirement is 0.01 and the Federal Reserve determined that it wanted to stimulate the economy by reducing short-term interest rates by

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Suppose that the reserve requirement is 0.01 and the Federal Reserve determined that it wanted to stimulate the economy by reducing short-term interest rates by 0.25% and estimated that this would require an approximate $ 1000 T dollar increase in MI to do this. If overall bank balance sheets for the entire economy looked like this: Required Reserve Ratio 1 percent Reserves 10 Trillion Total Lending in the Economy 1000 Trillion a. Suppose that the Fed wanted to stimulate the $ 1000 T increase in MI by changing the reserve requirement but not changing the reserve level of the private banking system. What would new overall bank balance sheet look like? (Fill in the balance sheet below) Required Reserve Ratio Reserves 10 Trillion Total Lending in the Economy b. Suppose the Fed wanted to leave the Required Reserve Ratio at 1% and instead use "Open Market Operations" to increase the money supply by $1000 T. How much in T-Bills would it need to buy from the banks, and from investors who deposit this cash in their deposit accounts at the banks, and what would the overall bank balance sheet for the banks look like after these purchases? (Fill in the balance sheet below). Required Reserve Ratio 1 percent Reserves Total Lending in the Economy c. Suppose the Fed wants leave the Required Reserve Ratio unchanged at 1% and does not want to buy T-Bills from the banks. Instead the Fed wants to lend reserves to the banks through the "Discount Window" to achieve the $ 1000 T increase in overall MI. What would the overall bank balance sheet for the banks look like after this lending (in this way the Fed is also able to affect short-term interests directly by charging a lower discount rate for its lending)? (Fill in the balance sheet below). Required Reserve Ratio 1 percent Reserves Total Lending in the Economy d. If the target Federal Funds rate that the Fed is aiming for is 1.75%, the Discount Rate is 2.75%, and the bank excess reserves are very high (as they are currently), what IOER would the Fed choose to get to a 1.75% Federal Funds Rate

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