Chapter 15

Question 1

At a high cost for reserves (meaning iff is high), the quantity demanded of Reserves is low. As the cost of acquiring reserves decreases (meaning iff falls), the quantity demanded of Reserves increases. So, the demand curve is downward sloping.

Until the interest rate quals the rate the Fed pays on excess reserves (ioer), where it becomes flat or infinitely elastic because…

Banks will not lend to other banks if they can earn a higher interest rate by holding excess reserves (if iff is below ioer).

Answer 1

Demand Curve

Question 2

Thus, the quantity of reserves originates from open market operations (NBR) and is set by the Fed so the supply curve is vertical..

Until the interest rate equals id where it becomes flat because banks will not borrow from other banks if it costs more than borrowing from the Fed (if iff is grater than id).

Soo iff cannot rise above id.

Answer 2

Supply Curve

Question 3

The Fed usually keeps its target for the federal funds rate above the interest rate paid on excess reserves so quantity demanded is in the downward sloping portion of the curve.

An open market purchase by the Fed causes an increase in the supply of nonborrowed Reserves

An open market sale by the Fed causes a decrease in the supply of nonborrowed reserves and the federal funds rate rises.

Answer 3

Open Market Operations

Question 4

The Fed usually keeps the discount rate above its target for the federal funds rate.
So, most changes in the discount rate have no effect on the federal funds rate.
If the demand for Resreves intersects the supply curve in the horizontal section, a decrease in the discount rate causes a fall in the federal funds rate.

Answer 4

Fed Discount Lending

Question 5

An increase inthe reserved requirement causes the demand for Reserves to increase and the federal funds rate rises
A decrease in the reserve reuqirement causes the federal funds rate to fall.

Answer 5

Reserve Requirements

Question 6

• Before the global financial crisis (2007-2009), the Fed relied primarily on open market operations to change non-borrowed reserves and keep the federal funds rate within the target range.
• Open market operations are used when the supply of reserves are limited, which occurs in the downward sloping portion of the demand curve for reserves. In this situation, small shifts in the supply of reserves impact the federal funds rate.

Open market operations are useful because they are flexible, easily reversed and can be implemented quickly.

Answer 6

Open Market Operations
Def

Question 7

lender that provides reserves to banks when no one else will; meant to provide reserves to prevent bank and financial panics.

When the Federal Reserve was created, its most important role was meant to be as the…

Answer 7

lender of last resort

Question 8

Federal Reserve facility at which discount loans are made to banks

The Fed has also used the discount window to provide liquidity to financial institutions during crisis situations such as the pandemic and the attacks on the World Trade Center in 2001.

Answer 8

Discount window

Question 9

-the interest rate charged on loans received from the regional Federal Reserve Bank; the rate on primary credit is currently 5.5%.

Answer 9

Discount rate

Question 10

The Fed began paying interest on reserves in 2008. Since then, interest on excess reserves has become a common tool used by the Fed to control the federal funds rate.

• When reserves are ample, which occurs in the flat portion of the demand curve for reserves, shifts in the supply of reserves do not impact the federal funds rate.
• So, when reserves are ample, the Fed uses the interest on excess reserves to influence the federal funds rate.
• The current interest rate paid on reserves is 5.4%.

Answer 10

Interest on Excess Reserves