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Suppose that the demand for reserves when the federal funds rate exceeds the interest rate on reserves is given by D=40-(2*i); where I is the federal funds rate in percent and D is expressed in billions of dollars. Suppose that the Fed supplies $28.0 billion in non-borrowed reserves and discount loans for business needs are $1.5 billion. Suppose that the primary credit discount rate is currently set at 6 percent and the interest rate on reserves is 2 percent.

A. Calculate the equilibrium federal funds rate, reserves, and the amount of discount loans for profit.

B. Suppose that the Fed reduces the supply of non-borrowed reserves to $26.0 billion. Now calculate the equilibrium federal funds rate, reserves, and the amount of discount loans for profit.

Business Economics, Economics

  • Category:- Business Economics
  • Reference No.:- M91919914

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