Session7_Suggestedanswers-1 - ECON102 On-Line Session 7...

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ECON102: On-LineSession 7: Suggested Answers to Assignment Questions on the Federal Funds Market N. AmanAnswers are in Blue1) In August 2011, the Fed's FOMC voted to decrease the federal funds rate target on several different occasions, reducing it to lower its target for the federal funds rate within the range between 0.25 basis points to 0% percent. The Committee took this action in light of evidence pointing to a weakening of economic activity and a reduction in inflationary pressures. What action in the "open market" would the Fed's trader have had to take, other things equal, in order to induce this decrease in the federal funds rate? (you do not need to give a specific numerical answer). For more information, you may also
2) Draw a supply- demand diagram of the Federal funds market which illustrates the effects of a massive treasury bill sale by the Fed in the “open market”.i-rateS' S0i'i0D0D'Volume of Funds/day3) If banks desire to increase their lending, but the federal reserve is not adding reserves to the banking system, what will happen to the level of short term interest rates? Explain your answer carefully.

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