Session 7: Suggested Answers to Assignment Questions on the Federal Funds Market
Answers are in
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
visit the relevant url of this news release at
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”.
Volume of Funds/day
3) 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.