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5. The Federal funds rate is determined in the interbank market for reserves. FOMC sets the federal funds target and the Fed changes interest paid on reserves balances (IORB) in such a way that the federal funds rate in the market (FFR) falls within the target range. Suppose FFR is 4% and the Federal Reserve sets IORB 4.5%: a. Would that increase or decrease banks' incentive to lend reserves in the federal funds market at 2%? b. Would that increase or decrease the supply of reserves in the federal funds market? c. Would that increase or decrease the FFR? d. So, as a result, what would be the lowest interest rate at which any bank would be willing to lend in the federal funds market? (Hint: think about the alterative risk-free return banks can earn)

5. The Federal funds rate is determined in the interbank market for reserves. FOMC sets the federal funds target and the Fed changes interest paid on reserves balances (IORB) in such a way that the federal funds rate in the market (FFR) falls within the target range. Suppose FFR is 4% and the Federal Reserve sets IORB 4.5%: a. Would that increase or decrease banks' incentive to lend reserves in the federal funds market at 2%? b. Would that increase or decrease the supply of reserves in the federal funds market? c. Would that increase or decrease the FFR? d. So, as a result, what would be the lowest interest rate at which any bank would be willing to lend in the federal funds market? (Hint: think about the alterative risk-free return banks can earn)

Brief Principles of Macroeconomics (MindTap Course List)
Brief Principles of Macroeconomics (MindTap Course List)
8th Edition
ISBN:9781337091985
Author:N. Gregory Mankiw
Publisher:N. Gregory Mankiw
Chapter11: The Monetary System
Section: Chapter Questions
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5. The Federal funds rate is determined in the interbank market for reserves. FOMC sets the federal funds target and the Fed changes interest paid on reserves balances (IORB) in such a way that the federal funds rate in the market (FFR) falls within the target range. Suppose FFR is 4% and the Federal Reserve sets IORB 4.5%: a. Would that increase or decrease banks' incentive to lend reserves in the federal funds market at 2%? b. C. Would that increase or decrease the supply of reserves in the federal funds market? Would that increase or decrease the FFR? d. So, as a result, what would be the lowest interest rate at which any bank would be willing to lend in the federal funds market? (Hint: think about the alterative risk-free return banks can earn)
Transcribed Image Text:5. The Federal funds rate is determined in the interbank market for reserves. FOMC sets the federal funds target and the Fed changes interest paid on reserves balances (IORB) in such a way that the federal funds rate in the market (FFR) falls within the target range. Suppose FFR is 4% and the Federal Reserve sets IORB 4.5%: a. Would that increase or decrease banks' incentive to lend reserves in the federal funds market at 2%? b. C. Would that increase or decrease the supply of reserves in the federal funds market? Would that increase or decrease the FFR? d. So, as a result, what would be the lowest interest rate at which any bank would be willing to lend in the federal funds market? (Hint: think about the alterative risk-free return banks can earn)
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