Chapter 9 - Federal Funds Rate Discount Rate Reserve...

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Unformatted text preview: Federal Funds Rate Discount Rate Reserve Requirement 18-1 Chapter 9 The Target Federal Funds Rate and Open Market Operations Interest rate on overnight interbank loans It is a market rate, the Fed doesnt control it precisely. Since they are the monopoly supplier of reserves, they influence the market by controlling supply. Could simply participate in the market as a borrower and a lender Dont lend because the market is unsecured Fed wont accept credit risk They dont borrow, because that would mean paying interest on reserves 18-2 The Target Federal Funds Rate: and the Market for Bank Reserves Use Open Market Operations Estimate the demand for reserves each morning, and then supply the amount they expect to meet the demand at the target interest rate. Reserve Demand Slopes Down For levels of reserves less than the discount rate, supply is vertical For levels of reserves more than the discount rate, supply is horizontal An increase in reserve demand is met by an open market purchase 18-3...
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This note was uploaded on 02/12/2012 for the course ECON 101 taught by Professor Abrams during the Spring '11 term at Adams State University.

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Chapter 9 - Federal Funds Rate Discount Rate Reserve...

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