Question
Using the supply and demand diagram of the market for reserves , Illustrate what happens to the federal funds rate, borrowed reserves, and non-borrowed reserves
Using the supply and demand diagram of the market for reserves, Illustrate what happens to the federal funds rate, borrowed reserves, and non-borrowed reserves, holding everything else constant, under the following scenarios.
Assume we are in the pre-financial crisis environment and banks are not holding an uncharacteristically large number of reserves.
The FOMC releases its policy statement saying that they lower the target federal funds rate by 25 basis points. Explain how the Fed actually implements this policy change, in a conventional economic environment, and illustrate how it is reflected in the market for reserves. (10 points)
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