9 On October 30, 2019, the FOMC lowered its target rate for the federal funds rate. As part of its announcement of thepolicy change, the FOMC stated that it was lowering the interest rate it paid on reserve balances from 1.80% to 1.55%and the interest rate it offered on reverse repurchase agreements from 1.70% to 1.45%.Briefly explain why in lowering its target for the federal funds rate, the FOMC had to lower these other two interest rates.O A. Banks lose money when the Fed lowers the FFR, so in order to maintain profitability in the banking system, theFed had to lower these other two rates to increase bank revenue.B. When the Fed changes the FFR, it only impacts commercial banks, so in order to be fair and lower rates fornonbank entities, it had to adjust these other two rates.C. Banks had been holding large amounts of excess reserves, making open market operations less effective atchanging the FFR, so the Fed began using these two rates instead to influence the FFR.D. If the Fed lowered the FFR without lowering these other two rates, it would cause banks to become less liquid,making them more unstable.C2.5-2.4-2.3-2.2-2.1-2-1.9-1.8-1.7-1.6-1.5-1.4-Federal funds rateDReserves, RSTopBottomOLy

Here, it is given that the Federal Reserve changes Federal funds rate in the market. At the same…

On October 30, 2019, the FOMC lowered its target rate for the federal funds rate. As part of its announcement of the policy change, the FOMC stated that it was lowering the interest rate it paid on reserve balances from 1.80% to 1.55% and the interest rate offered on reverse repurchase agreements from 1.70% to 1.45%. Briefly explain why in lowering its target for the federal funds rate, the FOMC had to lower these other two interest rates. O A. Banks lose money when the Fed lowers the FFR, so in order to maintain profitability in the banking system, the Fed had to lower these other two rates to increase bank revenue. OB. When the Fed changes the FFR, it only impacts commercial banks, so in order to be fair and lower rates for nonbank entities, it had to adjust these other two rates. OC. Banks had been holding large amounts of excess reserves, making open market operations less effective at changing the FFR, so the Fed began using these two rates instead to influence the FFR. OD. If the Fed lowered the FFR without lowering these other two rates, it would cause banks to become less liquid, making them more unstable. 2.5- 2.4- 2.3- 2.2- 2.1- 2- 1.9- 1.8- 1.7- 1.6- 1.5- 1.4- Federal funds rate D Reserves, R. Top Bottom Q G

On October 30, 2019, the FOMC lowered its target rate for the federal funds rate. As part of its announcement of the policy change, the FOMC stated that it was lowering the interest rate it paid on reserve balances from 1.80% to 1.55% and the interest rate offered on reverse repurchase agreements from 1.70% to 1.45%. Briefly explain why in lowering its target for the federal funds rate, the FOMC had to lower these other two interest rates. O A. Banks lose money when the Fed lowers the FFR, so in order to maintain profitability in the banking system, the Fed had to lower these other two rates to increase bank revenue. OB. When the Fed changes the FFR, it only impacts commercial banks, so in order to be fair and lower rates for nonbank entities, it had to adjust these other two rates. OC. Banks had been holding large amounts of excess reserves, making open market operations less effective at changing the FFR, so the Fed began using these two rates instead to influence the FFR. OD. If the Fed lowered the FFR without lowering these other two rates, it would cause banks to become less liquid, making them more unstable. 2.5- 2.4- 2.3- 2.2- 2.1- 2- 1.9- 1.8- 1.7- 1.6- 1.5- 1.4- Federal funds rate D Reserves, R. Top Bottom Q G

Survey Of Economics

10th Edition

ISBN:9781337111522

Author:Tucker, Irvin B.

Publisher:Tucker, Irvin B.

Chapter19: Money Creation

Section: Chapter Questions

Problem 6SQP

See similar textbooks

Similar questions

The following graph shows a hypothetical demand function for federal funds. Currently, the total amount of reserves in the banking system is $50 billion, the discount rate is 3.5 percent, and interest on reserves equals IOR = 1 percent. If demand for federal funds increases by $40 billion, the equilibrium fed funds rate will equal: Federal Funds Rate (FFR) 5.50% 5.00% 4.50% 4.00% 3.50% 3.00% 2.50% 2.00% 1.50% 1.00% 0.50% 0.00% SO $10 O a. FFR = 3.00% Ob. FFR = 3.50% O c. FFR = 4.00% d. FFR = 4.50% Oe. None of the above. $20 $30 $40 $50 $60 570 580 $90 $100 $110 $120 $130 $140 Bank Excess Reserves (SBillion)
The following graph shows a hypothetical demand function for federal funds. Currently, the total amount of reserves in the banking system is $50 billion, the discount rate is 3.5 percent, and interest on reserves equals IOR = 1 percent. The Fed wants to reduce the equilibrium fed funds rate to 1.5% by reducing the discount rate. In that case, it has to stand ready to provide $X billion of discount loans to the commercial banks at the new discount rate. What is the value of X? Federal Funds Rate (FFR) 5.50% 5.00% 4.50% 4.00% 3.50% 3.00% 2.50% 2.00% 1.50% 1.00% 0.50% 0.00% SO $10 O a. X= $0 billion O b. X= $10 billion O c. X= $20 billion O d. X= $30 billion e. None of the above. $20 $30 $40 $50 $60 $70 $80 $90 $100 $110 $120 $130 $140 Bank Excess Reserves ($Billion)
[Related to the Solved Problem] Use a demand and supply graph for the federal funds market to analyze the following situation. Be sure that your graph clearly shows changes in the equilibrium federal funds rate, changes in the equilibrium level of reserves, and any shifts in the demand and supply curves. Suppose that the Fed decides to increase the required reserve ratio, but does not want the increase to affect its target for the federal funds rate. Show how the Fed can use open market operations to accomplish this policy. To offset the effect of an increase in the required reserve ratio, which would increase the demand for reserves, the Fed could securities. sell buy -- Federal funds rate D2 D₁ R₁ Reserves S₁ Q
Federal Funds Rale The graph to the right illustrates how the Fed uses discounting to keep the federal funds rate from rising far above the federal funds target. It shows a rightward shift of the demand curve for reserves from R to R. The initial equilibrium is at point 1, where the discount rate (a) is above the federal funds rate, which is equal to its target level, i. The shift moves the equilibrium to point 2, where the federal funds rate equals the discount rate ( =l4). According to this graph, at point 2, borrowed reserves are: !3! A. equal to the distance between B and C. B. equal to the distance between A and B. C. equal to the distance between A and C D. zero.
The Bank of Key West is not going to have enough reserves at the end of the business day to meet its reserve requirement of 10%. It currently has two options to borrow money overnight in order to meet the requirement. First, it could borrow money from the Federal Reserve at a rate of 0.75% . Second, it could borrow money from other banks at a rate of 0.55%. What is the federal funds rate, and what is the discount rate? federal funds rate: % discount rate: % What will happen to other short-term interest rates if the Fed increases its federal funds rate target? They will become irrelevant. They will decrease. They will remain unchanged. O They will also increase.
3/25/22, 8:55 PM Assignment Print View 5. Suppose the reserve requirement is 20% and that the initial federal funds rate target is 5%. The federal funds market and the money market are in equilibrium as shown in the graphs below. a. Suppose the Federal Reserve wants to raise the federal funds rate from 5% to 7%. It will require a $30 billion open market sale to achieve this goal. Show the change in the supply of reserves curve and indicate the new quantity of reserves in the federal funds market. Instructions: Use the tool provided "Sf.1" to draw a new supply of reserves curve. Plot only the endpoints of the line (2 points total). Use the tool provided "New Quantity" to plot the new equilibrium quantity of reserves in the federal funds market. Federal Funds Market 11 Tools 10 9. Sff,1 New Quantity 7 4 1 15 30 45 60 75 90 105 120 135 150 Quantity of Reserves (billions of dollars) b. If the Federal Reserve makes an open market purchase of $30 billion, the total money supply will decrease…
Assume that banks are able to lend out 85 cents on every dollar deposited, and a bank receives $9,000 in deposits. What is the reserve requirement? Find the money multiplier. How much money is ‘created’ from the $9,000 deposit? If the reserve requirement is altered to 10%, what will this do to the money supply? What does this do to equilibrium interest rate in the market for loanable funds? (Show on a graph.) What is another way the Federal Reserve will achieve the same outcome in Part D?
2.5 Use graphs of the federal funds market to illustrate the effect on the demand for reserves or the supply of reserves of each of the following Fed policy actions (be sure to explain what is happening in your graphs): a) A decrease in the required reserve ratio b) A decrease in the discount rate c) A decrease in the interest rate paid on reserves d) An open market sale of government securities
Article Summary In a September 2019 tweet, President Trump said that Fed officials should cut interest rates to zero or below, adopting a policy that has been used in Europe and Japan. Negative interest rates would result in commercial banks paying the Fed interest for funds kept at the central bank instead of banks receiving interest on their reserves. If negative rates become a reality in the United States, consumers may end up having new fees to pay on their bank accounts and investors could be faced with negative yields on government bonds. President Trump has pushed for zero or negative interest rates to spur the economy and to combat the strengthening dollar in European markets, where negative rates have weakened the euro and made U.S. exports less competitive. Critics of possible negative interest rates have pointed to the mixed results in Europe, with some reports stating that lending has increased because of the rates, and other reports stating the opposite. Some critics have…
11. Describe how the usefulness of the federal funds rate has changed from before the financial crisis to after. Targeting the federal funds rate (is, is not ) as important a tool today as it was before the financial crisis. That is because banks generally have, have not ) enough in reserves to meet their reserve requirement and ( more, no longer ) need to borrow from one another in the federal funds market. As a result, the federal funds market and the federal funds rate became (very relevant, irrelevant ). Today, the Fed still sets a target for the federal funds rate but finds it (more, less ) effective to just change the interest rate on banks' reserves. By adjusting the interest rate paid on excess reserves, the Fed can stimulate or restrict lending, money creation, and interest rates even while the banking system remains awash in reserves.
Using the supply and demand analysis of the market for reserves, indicate what happens to the federal funds rate, borrowed reserves, and nonborrowed reserves, holding everything else constant, under the following situations. Be sure to fully explain the shifts in reserve demand, reserve supply, and changes in the federal funds rate. Please include a picture of your graphs in the folder below.
The Bank of Key West is not going to have enough reserves at the end of the business day to meet its reserve requirement of 10%. It currently has two options to borrow money overnight in order to meet the requirement. First, it could borrow money from the Federal Reserve at a rate of 1.35%. Second, it could borrow money from other banks at a rate of 0.55%. What is the federal funds rate, and what is the discount rate? 1.35 federal funds rate: Incorrect I 1.55 discount rate: Incorrect What will happen to other short-term interest rates if the Fed increases its federal funds rate target? They will also increase. They will remain unchanged.. They will become irrelevant. They will decrease.