Question 2 0.67 / 1 pts 7.0% 6.5% 6.0% 5.5% 5.0% 4.5% 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% $0 $10 520 530 540 55

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Question 2 0 67 1 Pts 7 0 6 5 6 0 5 5 5 0 4 5 4 0 3 5 3 0 2 5 2 0 1 5 1 0 0 5 0 0 0 10 520 530 540 55 1 (55.67 KiB) Viewed 27 times

Question 2 0.67 / 1 pts 7.0% 6.5% 6.0% 5.5% 5.0% 4.5% 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% $0 $10 520 530 540 550 560 570 580 590 $100 $110 $120 $130 $140 $150 $160 Bank Excess Reserves ($Billion) Consider the above graph that shows demand for excess reserves by the banking system as a whole. The discount rate is 4.5 percent and the Fed pays an interest of 1.50 percent on excess reserves. Currently banks as a whole are holding an excess reserve of $70 billion. This means that the equilibrium fed funds rate is 3.00 percent. The Fed increases the supply of excess reserves by $20 billion through an open market purchase of bonds. As a result, the equilibrium fed funds changes to 2.00 percent. The Fed increases the supply of excess reserves by another $30 billion through another round of open market purchases. As a result the equilibrium fed funds rate changes to 0.50 percent. Federal Funds Rate