Q. Suppose the Fed lowers the interest rate paid on reserves. Draw the money supply /...

Q. Suppose the Fed lowers the interest rate paid on reserves. Draw the money supply / money demand graph, starting from the initial equilibrium, then show clearly the impact on the real interest rate and the quantity of money. Use good labels.

Solutions

Expert Solution

Question

It has been stated that Fed has lowered the interest rate paid on reserves.

This reduction in interest rate paid on reserves by Fed will induce the banks to keep less reserves with Fed and to lend more.

As banks will lend more, the money supply in the economy will increase.

This increase in the money supply will shift the money supply curve to the right.

Following is the required figure -

The above figure shows that the increase in the money supply has shifted the money supply curve to the right from MS to MS1.

This has resulted in a decrease in the real interest rate (from r to r1) and an increase in the quantity of money (from M to M1).

Thus,

When the Fed lowers the interest rate paid on reserves then the real interest rate decreases and the quantity of money increases.

Rahul Sunny answered 3 months ago

Next > < Previous

Related Solutions

a. Suppose the Fed increases the interest rate that it pays on reserves. Show with a...

a. Suppose the Fed increases the interest rate that it pays on reserves. Show with a diagram how that would affect the Fed Funds market. Explain. b. What happens to the money supply (say M1) as a result of this action? Explain. Diagrams are mandatory

True false: If the Fed lowers the money supply, the price level effect will tend to...

True false: If the Fed lowers the money supply, the price level effect will tend to lower the equilibrium interest rate. Municipal bonds tend to have lower yields than government bonds of the same maturity. If a corporate bonds becomes more liquid, its risk premium will fall.

1) Suppose that the Fed decides to increase the growth rate of the money supply in...

1) Suppose that the Fed decides to increase the growth rate of the money supply in the United States. What is most likely to happen to the U.S. trade deficit and to GDP? Answer. The trade deficit will fall; GDP will rise Please explain why? 2) Explain three factors that would cause the dollar to appreciate?

Q: When the Fed began paying interest on excess reserves in 2009, excess reserves ballooned. Now,...

Q: When the Fed began paying interest on excess reserves in 2009, excess reserves ballooned. Now, the old approach of buying and selling tbills will no longer have the same impact on the Fed funds rate. Brie y explain how the Fed will control the Fed funds rate from now on.

Other things the same, if the Fed increases the money supply, the interest rate rises so...

Other things the same, if the Fed increases the money supply, the interest rate rises so aggregate demand shifts right. rises so aggregate demand shifts left. falls so aggregate demand shifts right. falls so aggregate demand shifts left.

Draw two money market graphs ( money supply & money demand) that demonstrates how the Fed...

Draw two money market graphs ( money supply & money demand) that demonstrates how the Fed closes the inflationary gap, and also a recessionary gap.

suppose the fed decreases the discount rate and buys bonds sufficient to increase the money supply...

suppose the fed decreases the discount rate and buys bonds sufficient to increase the money supply by $200 billion. what impact will this have on the interest rate, investment spending, real gdp, and the price level? would that be a good idea in today's economic environment? why or why not? draw graphs to illustrate your points, and describe them and the points thereon thoroughly.

1). The Fed can influence economic environment by regulating the money supply and interest rate. Discuss...

1). The Fed can influence economic environment by regulating the money supply and interest rate. Discuss the main instruments that the Fed uses to achieve this. In your discussion give examples of how the Fed would address, a) inflationary gap, b) recessionary gap. 2). Critics of federal banking policy argue that deposits insurance is a key for banking failures. The banks enjoy a "heads I win, tails the government loses" proposition. Several possible reforms of deposit insurance have been suggested....

Suppose the central bank targets the money supply. As a result, the interest rate will ______...

Suppose the central bank targets the money supply. As a result, the interest rate will ______ and output will ______ following an increase in government spending A fall;rise B rise;fall C rise;rise D fall; fall

Suppose the Fed reduces the money supply by 5 percent. Assume the velocity of money is...

Suppose the Fed reduces the money supply by 5 percent. Assume the velocity of money is constant. A. What happens to the aggregate demand curve? B. What happens to the level of output and the price level in the short run and in the long run? C. In light of your answer to part (b), what happens to unemployment in the short run and in the long runaccording to Okun’s law? D. What happens to the real interest rate in...

Subjects