ECO3011017 - ECO 301 Mike Mesrobian 10/17/2011 Fed Funds...

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ECO 301 Mike Mesrobian 10/17/2011 Fed Funds Market: - influences supply and demand with tools - Demand for reserves o Interest on demand for reserves is I_mf o Downward sloping demand curve o Higher interest means smaller demand for reserves, lowers demand for more money o Shifts: Reserve ratio: higher ratio more reserves needed Excess reserve ratio goes up, banks want to hold more reserves, demand increases Excess reserve ratio has gone from close to 0 to 130% in recent years Demand for bank loans: demand for loans from banks to the public….indirect demand for money market - Shifts o R_cd o E o Demand for bank loans - Kink o Interest rate on Reserves paid for by the Fed - fed funds interest rate lower than interest rate o more institutions than banks use fed funds - Supply of Fed Funds o As I_ff rises to I_discountrate “any” level of reserves are available…hits a certain bench mark and unlimited funds available o Open market operations affect rate Expansionary OMO increases reserves
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ECO3011017 - ECO 301 Mike Mesrobian 10/17/2011 Fed Funds...

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