F19HW Graph A Graph B Graph C SM1 Federal Funds Rate Interest Rates E.docx - F19HW Graph A Graph B Graph C SM1 Federal Funds Rate Interest Rates

# F19HW Graph A Graph B Graph C SM1 Federal Funds Rate Interest Rates E.docx

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F19HW Graph A Graph B Graph C SM1 Federal Funds Rate Interest Rates Expected Rate of Return / Real Interest 450 6 10 14 18 Investment 150 200 250 300 350 50 150 250 350 Quantity of Fed Funds Money Supply All column are cumulative. Example. Column 2 will be based off your answer in column 1, etc. All Commercial Banks 23 Reserves \$200 Securities \$450 Loans \$550 Note: Assume interest rate on excess reserves is the true floor (no reverse repo rates in this exercise) Deposits Loans owed to Federal Reserve \$800 \$400 Assumptions: 25% Reserve requirement All bank reserves are put into the fed funds market 1 What is the current discount rate? What is the interest rates on excess reserves? 2 How much excess reserves are in the banking system? 3 The Fed would like to encourage more capital investment. Which of the following options is consistent with this goal? A. Buy securities from commercial banks and decrease the Fed Funds Rate C. Sell securities to commercial banks and decrease the Fed Funds Rate B. Buy securities

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Unformatted text preview: from commercial banks and increase discount rate D. Sell securities to commercial banks and increase the discount rate 4 Based on your answer to #3, the Fed conducts \$25 in open-market operations, complete the transaction using column #1 5 Adjust graph A to reflect the new level of reserves in the banking system. What is the new Fed Funds rate? 6 How much will the money supply eventually change if banks lend out all their excess reserves? 7 Complete column #2 assuming the commercial banks lend out all of their excess reserves 8 Ajust graph B to reflect the increase in money supply. What is the new level of real interest rates? 9 What impact did the change in interest rates have on investment (increase/ decrease and how much \$)? Increase/ decrease? 10 What impact will the change in investment have on AD(increase / decrease and how much \$) assuming an MPC of: 0.75 Increase/ decrease? 11 Complete column #3 assuming the banks borrow \$50 from the Federal Reserve...
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• Winter '19
• Richard Levi

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