Federal Funds Market
Use demand and supply graphs for the federal funds market to analyze each of the following three situations. Be sure that your graphs clearly show changes in the equilibrium federal funds rate
a. Suppose the Fed decides to increase its target for the federal funds rate from 2% to 2.25%, while also increasing the discount rate from 2.5% to 2.75%.
b. Consider a situation with the equilibrium federal funds rate equal to 3%. Now suppose because of strain in the financial markets banks decide they want to hold more reserves to meet their liquidity needs. In response the Fed takes actions to maintain the federal funds rate at 3%.
c. Show the current situation that the US federal funds market is in as of late 2016. Mark the numerical values for the federal funds rate, the interest paid on reserves and show the equilibrium point.
d. How does the Fed plan to increase the fed funds rate going forward?