The Federal Funds Rate is an important interest rate that the Federal Reserve (Fed) pays attention to when conducting monetary policy.

1.Explain the Federal Funds Rate.

2.Suppose the Fed wants to lower the Federal Funds Rate. What open-market operation would it use?

3.Assume that the open-market operation that you indicated in problem 2 is equal to $20 million. If the required reserve ratio is 0.1, calculate the maximum change in loans throughout the banking system.

4.Identify the effect of the open-market operation in problem 2 on the nominal interest rate.

5.Suppose that the Fed's action results in an increase in the price level. What would be the impact of the open-market operation on the real interest rate? Explain.