The January 22, 2008, press release of the Federal Open Market Committee (FOMC) states that the FOMC "decided to lower its target for the federal funds rate by 75 basis points to 31 ⁄2 percent." The press release goes on to say that "In a related action the Board of Governors approved a 75-basis point decrease in the discount rate to 4 percent."
a. Use a demand and supply graph for 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 41 ⁄4% and the discount rate 43 ⁄4%.
b. Use your graph to show how the Fed would lower the federal funds rate by 75 basis points (3 ⁄4%). Show in your graph the 75-basis point increase in the discount rate. What policy action would the Fed use to lower the federal funds rate by 75 basis points?