Market for reserves is in equilibrium at federal funds

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Reference no: EM131571107

Suppose the market for reserves (the liquidity preference model) is in equilibrium at a federal funds rate at 5%

a) Depict this situation graphically.

b) Suppose the Federal Reserve then decides to start paying 1% interest on reserves banks. Graph effect this will have on equilibrium federal funds rate.

Reference no: EM131571107

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