What will happen if the economy enters into recession

Reference no: EM131777049

Question: For each of the following, draw a supply and demand diagram for the overnight interest rate. Also, provide a brief written explanation of your answer and what will happen to the overnight interest rate.

a) Currently the equilibrium overnight rate is 4% and there is $0B in borrowed reserves. The rate the Central Bank charges for overnight loans is 5% and pays 4% for reserves. Show what will happen if the economy booms.

b) Currently the equilibrium overnight rate is 3% and there is $0B in borrowed reserves. The rate the Central Bank charges for overnight loans is 3% and it pays 3% on reserves. Show what will happen if the Fed sells bonds to banks.

c) Currently the equilibrium overnight rate is 4% and there is $0B in borrowed reserves. The rate the Central Bank charges for overnight loans is 5%. The Central Bank also pays 3% on any deposits banks keep at the Central Bank Show what will happen if the economy enters into recession.

Reference no: EM131777049

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