ECO 4223 Homework 9

ECO 4223 Homework 9

In the market for reserves, the federal funds interest rate is currently 11% while the discount rate is at 13%.  If the Federal Reserve Bank aims to increase the equilibrium interest rate, then it can

lower the reserve requirements

increase the discount rate

sell securities

decrease the discount rate


Say that there is a large rise in demand for reserves by a number of different banks.  In the market for reserves, the equilibrium interest rate should never go above

ier

id

10%

the required reserve ratio

Suppose that in the market for reserves, the equilibrium interest rate, iff is currently below id.  If the Federal Reserve bank decides to increase the required reserve ratio, then we would expect that the ____ should ____.

discount rate; rise

discount rate; fall

iff rate; fall

iff; rise

The Federal Reserve bank buys securities and after the purchase, the equilibrium interest rate in the market for reserves doesn’t change at all.  This implies that prior to the purchase, the equilibrium iff rate is

greater than id

equal to id

less than id

is exactly 1%

Suppose that the FR Bank raises the required reserve ratio for commercial banks, but does this for reasons other than trying to change the federal funds rate, which was below the discount rate prior to the policy change.  If the FR Bank wants a defensive operation to counter the change in the interest rate, it can

buy securities

raise the discount rate

sell securities

none of the above

Here’s the SOLUTION

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