We are going back to the fall of 1998, back in the 'midst' of the new economy. The U.S. economy weathered the E. Asian quite well and the U.S. economy, by almost all accounts, was performing brilliantly. In August of 1998, Russia defaulted on all the debt held by foreign investors. This "shock" rattled financial markets so much that the Fed went into action and lowered short term interest rates 3 times in a seven-week period. In what follows, we are going to model this 7 weeks period using our new acquired reserve demand/reserve supply diagram.

Here are the relevant dates and interest rates: Point A: August 1998: i_ff = 5.5% Point B: September 1998: Lowered interest rates to i_ff =5.25% Point C: October 1998: Lowered interest rates to i_ff = 5.00% Point D: November 1998: Lowered interest rates to i_ff = 4.75%

Note importantly, we are modeling the behavior of the federal funds rate during this period. The forecasted reserve demand at this time is given below. For simplicity, this reserve demand function is stable (constant) throughout this exercise: R_d = 950 - 110 i_ff

1) What is the value of the Reserve Supply in August 1998? Hint: use the R_d equation and the value of iff to get the value for R_d. Then remember that R_d=R_s in equilibrium

A)427.5 B)345 C)350 D)400

2) What is the value of the Reserve Supply in September 1998?

A)400 B)375 C)345 D)372.5

3) Is this change in the R_s due to open market purchases or sales?

A) sales B)purchases

4) What is the value of the Reserve Supply in October 1998?

A) 372.5 B)400 C)345 D)427.5

5) What is the value of the Reserve Supply in November 1998?

A)427.5 B)400 C)425 D)345