In this problem, we consider the diagram of supply and demand in the market for reserves.

1. (3 marks)Why is the supply of funds when a federal funds rate (or cash rate) is equal to the discount rate?
2. (3 marks) Why is the demand for funds when a federal funds rate (or cash rate) is equal to the interest rate on reserves?
3. (3 marks) Explain why in an efficient market, a return under optimal forecasts equals an equilibrium return and all unexploited profit opportunities will be eliminated by using their relationship within two to three sentences.

Answer rating: 100% (QA)

3 marks The supply of funds is equal to the demand for funds when the federal funds rate or cash rat... View the full answer