The January 22, 2008 press release of the FOMC states that the FOMC “decided to lower its target for the federal funds rate by 75 basis points to 3½ percent.” The press release goes on to say: “In a related action the Board of Governors approved a 75-basis point decrease in the discount rate to 4 percent.”
a. Use a graph of the federal funds market to show the equilibrium federal funds rate and the discount rate before the policy action of January 22, 2008, when the federal funds rate was 4¼% and the discount rate was 4¾%.
b. Use your graph to show how the Fed would lower the federal funds rate by 75 basis points (¾%). Show in your graph the 75-basis-point decrease in the discount rate. What policy action would the Fed use to lower the federal funds rate by 75 basis points?
c. Today, would the Fed use the same policy action you described in part (b) to lower the federal funds rate? Briefly explain.