Problem
1) If a switch occurs from deposits into currency, what happens to the federal funds rate? Use the supply and demand analysis of the market for reserves to explain your answer.
2) Why is it that a decrease in the discount rate does not normally lead to an increase in borrowed reserves? Use the supply and demand analysis of the market for reserves to explain.
3) Suppose that the FOMC decides to lower its target for the federal funds rate. How can it use open market operations to accomplish this goal? How can the FOMC use open market operations to raise its target for the federal funds rate? Use a graph of the federal funds market to illustrate your answers. Does it matter for your answer whether reserves are scarce? Briefly explain.