Explain why changing the interest rate paid on excess reserves
is the only viable means at...
Explain why changing the interest rate paid on excess reserves
is the only viable means at this time for the Fed to normalize the
federal funds rate. Illustrate this situation.
Solutions
Expert Solution
The interest rate on the excess reserves primary way the FOMC
can control the Fed Funds rate
Fed has earned interest due to QE, but if the Fed starts
raising rates, it is the interest on excess reserves that control
the Fed Funds rate
The Fed Funds rate can be brought into the target range, using
normalization, and by adjusting the interest rate the Fed pays on
the excess reserve balances
Cash has moved out of the Fed Funds market since the
introduction of the IoER.
The size of the Fed Funds market has shrunk since the financial
crisis, the Fed Home Loan Banks are stuck in the market as they
cannot deposit cash, directly at the Fed, the way the banks
can
The interest rate on excess reserves serves as a proxy for the
Fed Funds.
Fed raises the Fed Funds rate by increasing the amount it pays
in interest on excess reserves. The imbalance between the demand,
and, the supply of excess reserves raises the Fed Funds rate.
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.
Assume federal funds rate is greater than the interest rate paid
on reserves. What happens to the federal funds rate when the Fed
increases the interest rate on reserves? Draw the graphand
explain.
Assume federal funds rate is greater than the interest rate paid
on reserves. What happens to the federal funds rate when the Fed
increases the interest rate on reserves? Draw the graph and explain
in simple terms
The bank of Zambia is discussing the possibility of
paying interest on excess reserves . If it occurs , what will
happen to the level of excess reserves to deposits ratio?
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.
(a) Explain why would a company engage in an interest rate swap
over other means of managing risk?
(b) The AT Corporation is holding a large number of XXY Bank
shares in an investment portfolio and wishes to protect the value
of the investment. The XXY Bank shares currently trade at $22.00.
The AT Corporation buys a put option with an exercise price of
$20.00 per share and a premium of $0.85 per share. By entering this
option strategy, explain...
A. What are excess reserves? What are the factors that determine
how much a bank would like to hold in excess reserves? Briefly
explain.B> One morning the Open Market Account Manager at the New
York Federal Reserve Bank observes that the equilibrium (market)
federal funds rate is 3.25%. Suppose the target federal funds rate
is 2.5%. What does this indicate about total reserves in the
banking system? What would the Account Manager decide to do (open
market purchase or open...
Explain why would a company engage in an interest rate swap
over other means of managing risk?
The AT Corporation is holding a large number of XXY Bank shares
in an investment portfolio and wishes to protect the value of the
investment. The XXY Bank shares currently trade at $22.00. The AT
Corporation buys a put option with an exercise price of $20.00 per
share and a premium of $0.85 per share. By entering this option
strategy, explain whether the...
When the interest rate is below the equilibrium interest rate, there is an excess ________ money and the interest rate will ________.A) demand for; fallB) supply of; fallC) demand for; riseD) supply of; rise