Question 3 0/1 pts 7.0% 6.5% 6.0% 5.5% 5.0% 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% 50 510 520 530 540 550 560 570

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Question 3 0 1 Pts 7 0 6 5 6 0 5 5 5 0 4 0 3 5 3 0 2 5 2 0 1 5 1 0 0 5 0 0 50 510 520 530 540 550 560 570 1 (60.98 KiB) Viewed 17 times

Question 3 0/1 pts 7.0% 6.5% 6.0% 5.5% 5.0% 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% 50 510 520 530 540 550 560 570 580 590 $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. Let's consider several monetary-policy scenarios. The Fed reduces the discount rate by 1 percent. Following this policy, the equilibrium federal funds rate will equal 4.00 percent. Next, the Fed reduces the discount rate by another 1 percent. Following this second policy action, the equilibrium federal funds rate will equal 5.00 percent. However, to keep the fed funds rate at this level, the Fed needs to increase the supply of excess reserves in the banking system by 40.00 billion dollars (say, through an open market purchase). Okay, this scenario rarely happens. So let's move to the next one. Federal Funds Rate