Compute the equilibrium values for federal funds rate

Assignment Help Business Economics

Reference no: EM131377254

Open Market Operation

Suppose the federal funds market is described by the following equations:

Q d = 100 - 100i ff

Q s = 95

Where Qd denoted the quantity of reserves demanded, as function of the federal funds rate if f ; and Qs denotes the quantity of reserves supplied. NOTE: to start with, lets assume that the Fed does not pay any interest rate on reserves held by private banks at the Fed): ier = 0: Answer to the following

1. Draw a graph displaying both supply and demand, and identify the equilibrium point.

2. Using the specific functional forms, compute the equilibrium values for the federal funds rate and the amount of reserves.

3. How would the graph in 1. and the answer in 2. change if suddenly the Fed decided to pay ier = 0:01 (1%)

4. Now, suppose the Fed would like to lower the equilibrium federal funds rate to 2%. By how much should the Fed increase the supply of reserves? What happens graphically?

5. By how much should the Fed further increase reserves to cut the federal funds rate to 0.5%? Explain.

Reference no: EM131377254

Questions Cloud

Total cost is function of output : Total cost is a function of output Q. TC = f (Q). The average total cost function can be found by dividing the total cost function by Q. What does the first derivative (dATC/dQ) of the ATC function show?

The general agreement on tariffs and trade : Discuss the following acts or legal principles and their application to companies doing business overseas. Give an example of a legal case(s) that analyze or whose decision discusses these laws/principles. what is the defination and history behind it..

Example of cost-plus pricing : Over the past half century, the Amalgamated Metals Company -- a big firm in an oligopolistic industry -- has changed its price schedule many times in response to pricing actions initiated by an even bigger firm. Which term best describes the Amalgama..

What do economists call : What do economists call the difference between how much a consumer is willing and able to pay for a good or service and the dollar amount that he or she actually pays for it?

Compute the equilibrium values for federal funds rate : Where Qd denoted the quantity of reserves demanded, as function of the federal funds rate if f ; and Qs denotes the quantity of reserves supplied. Draw a graph displaying both supply and demand, and identify the equilibrium point. Using the specific ..

Performed the bulk of the agricultural labor : What populations have performed the bulk of the agricultural labor in the U.S. since the beginning of the 19th century? Do you think getting paid for "piece work" (e.g., paid per unit picked) rather than an hourly wage is a fair and equitable system ..

What populations have performed bulk of agricultural labor : What populations have performed the bulk of the agricultural labor in the U.S. since the beginning of the 19th century? Do you think getting paid for "piece work" (e.g., paid per unit picked) rather than an hourly wage is a fair and equitable system ..

What effect does expansionary fiscal policy : What effect does expansionary fiscal policy (under flexible exchange rate) have on the supply and demand for dollar in the FX market? What happen to the nominal price of the dollar, export, import and aggregate demand?

Preventing another recession or promoting strong recovery : Did the Federal Reserve's actions succeed in preventing another recession or promoting a strong recovery? Identify which credit facilities/programs were effective and which were not as effective.

User Account

All Pages