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Use the supply and demand analysis of the market for reserves to visually illustrate and explain how the following scenarios may arise in equilibrium. A
Use the supply and demand analysis of the market for reserves to visually illustrate and explain how the following scenarios may arise in equilibrium.
- A decrease in reserve requirements changes borrowed reserves from positive to zero without changing the federal funds rate.
- An increase in the reserve interest rate increases the interbank rate and makes it equal to the discount rate.
- An infinitely small open market purchase decreases the federal funds rate but an equally small open market sale does not change federal funds rate.
- A market panic leads to a deposit outflow from banks and increases the federal funds rate.
- When the initial federal funds rate is lower than the discount rate, an open market purchase vis--vis the non-bank public changes neither the quantity of reserves nor the federal funds rate.
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