CoursHeroTranscribedText Fed Funds Rate 7.00% 6.50% 6.00% 5.50% 5.00% 4.50% 4.00% 3.50% 3.00% 2.50% 2.00% 1.50% 1.00%

 

 

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Fed Funds Rate 7.00% 6.50% 6.00% 5.50% 5.00% 4.50% 4.00% 3.50% 3.00% 2.50% 2.00% 1.50% 1.00% 0.50% 0.00% $100 $110 $120 $130 $140 $150 $160 Bank Excess Reserves ($Billion) Consider the above graph that shows demand for excess reserves by the banking system as a whole. The discount rate is 4.5 percent and the Fed pays an interest rate of 1.50 percent on excess reserves. Currently banks as a whole are holding an excess reserve of $70 billion. This means that the equilibrium fed funds rate is percent. Suppose that demand for excess reserves by the banking system increases by $20 billion (banks collectively want to hold $20 billion more excess reserves). In that case, the equilibrium fed funds rate will increase to percent. Suppose that demand for excess reserves by the banking system increases by another $20 billion (now demand has increased by a total of $40 billion). In that case, the equilibrium fed funds rate will increase to percent. Fed Funds Rate 7.00% 6.50% 6.00% 5.50% 5.00% 4.50% 4.00% 3.50% 3.00% 2.50% 2.00% 1.50% 1.00% 0.50% 0.00% $100 $110 $120 $130 $140 $150 $160 Bank Excess Reserves ($Billion) Consider the above graph that shows demand for excess reserves by the banking system as a whole. The discount rate is 4.5 percent and the Fed pays an interest rate of 1.50 percent on excess reserves. Currently banks as a whole are holding an excess reserve of $70 billion. This means that the equilibrium fed funds rate is percent. Suppose that demand for excess reserves by the banking system increases by $20 billion (banks collectively want to hold $20 billion more excess reserves). In that case, the equilibrium fed funds rate will increase to percent. Suppose that demand for excess reserves by the banking system increases by another $20 billion (now demand has increased by a total of $40 billion). In that case, the equilibrium fed funds rate will increase to percent.

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