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Homework answers / question archive / Show graphically the effect of an open market purchase in the market for reserves (federal funds market) when the relevant portion of the demand curve is the downward sloping portion
Show graphically the effect of an open market purchase in the market for reserves (federal funds market) when the relevant portion of the demand curve is the downward sloping portion. What is the effect on the federal funds rate? [4 points) b. Show graphically the effect of an open market purchase in the market for reserves (federal funds market) when the relevant portion of the demand curve is the horizontal portion. What is the effect on the federal funds rate?
We measure quantity of federal funds on horizontal axis and federal fund rate on vertical axis. Demand curve for federal funds is downsloping and supply curve of federal funds is vertical straight line.
a. Suppose federal funds market is equilibrium where demand curve for federal funds and supply curve for federal funds intersects and detemine Q* level quantity of federal funds and fr* level of federal fund rate.
Suppose Federal Reserve conducted an open market purchase in market for federal funds. It increases supply of federal funds or reserves in market. It shifts supply curve rightward. It increases the quantity of federal funds to Q1 and reduce federal funds rate to fr1.
b. Suppose federal funds market is equilibrium where demand curve for federal funds and supply curve for federal funds intersects and detemine Q* level quantity of federal funds and fr* level of federal fund rate. Let us consider demand curve for federal funds is horizontal line.
Suppose Federal Reserve conducted an open market purchase in market for federal funds. It increases supply of federal funds or reserves in market. It shifts supply curve rightward. It increases the quantity of federal funds to Q1 and but federal funds rate remain same. Because demand for federal funds is perfectly interest elastic. So even federal funds increases or decreases, federal funds rate remains same
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