Question

8. Determine how each of the following Fed actions would affect bank reserves, the money supply, and the federal funds rate. Answer INCREASE, DECREASE, or NO EFFECT.

Fed Action	Bank Reserves	Money Supply	Fed Funds Rate
Sell Treasury bonds on the open market
Buy Treasury bonds from banks
Raise the discount rate
Lower the discount rate
Raise the reserve requirement
Lower the reserve requirement

Answer 1

-->Selling treasury bonds in the open market will lead to reduced reserves with commercial banks,which in turn reduces money supply in the economy. Since there is a low level of money supply,feds fund rate is also increased.

--> Buying treasury bonds from the banks will lead to increased reserves with commercial banks,which in turn increases money supply in the economy. Since there is a high level of money supply,feds fund rate is also decreased.

--> discount rate is the rate of interest which a central bank charges on its loans and advances to a commercial bank. Raising the discount rate will lead to reduced bank reserves and reduced money supply due to high cost of borrowing. Since there is less liquidity,feds fund rate will raise.

--> Lowering the discount rate will lead to increased bank reserves and increased money supply due to low cost of borrowing. Since there is enough liquidity,feds fund rate will decrease.

--> Raising the reserve requirment also reduces bank reserves,money supply and will lead to increased feds fund rate.

--> Lowering the reserve requirment will lead to increased reserves and money supply and will lead to reduced feds fund rate.