Reference no: EM132649129

1) The June 13, 2018 press release of the FOMC (https://www.federalreserve.gov/newsevents/pressreleases/monetary20180613a.htm) states that the FOMC "raise the target range for the federal funds rate to 1-3/4 to 2 percent." The previous target range had been 1-1/2 to 1-3/4 percent. The press release goes on to say that in "a related action the Board of Governors approved a ¼ percentage point increase in the primary credit [discount] rate to 2.50 percent."

a. Use a supply-and-demand graph of the market for bank reserves within a floor system to show the equilibrium federal funds rate as well as the discount rate before the policy action of June 13, 2018, when the target range for the funds rate was 1-1/2 to 1-3/4 percent and the discount rate was 2-1/4 percent.

b. Next use your graph from part (a) to show how, in a floor system, the Fed would raise the target range for the federal funds rate by 25 basis points (¼ percent), both at the top end of the range and at the bottom. Also show in your graph the 25-basis point increase in the discount rate. What specific policy actions (tools) would the Fed use to lift the upper and lower bounds on its desired range for the federal funds rate by 25 basis points?