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Open market operations change the quantity of non-borrowed r

Paper help Economics Open market operations change the quantity of non-borrowed r

Economics

Open market operations change the quantity of non-borrowed r

Open market operations change the quantity of non-borrowed reserves. An open… Show more Open Market Operations Open market operations change the quantity of non-borrowed reserves. An open market purchase will increase the supply of reserves, while an open market sale will decrease the supply of reserves. If the supply of reserves increases, then the federal funds rate will decline. An open market purchase will increase the supply of reserves and reduce the federal funds rate. An open market sale would have the opposite effect, decreasing the supply of reserves and increasing the federal funds rate. (Just reverse the arrows.) When the equilibrium lies along the horizontal portion of the reserve demand curve, then an increase in reserve supply will not change the federal funds rate. Here, the Fed can expand reserves without affecting the federal funds rate. This seems to be the general trend in reserves markets from mid-2009 until mid-2013 at least. With QE2 the Fed was increasing reserves without changing the federal funds rate, so it has been moving along the horizontal portion of the reserve demand curve. 1. Using the model of the market for reserves presented in Class 15, please show the effects of an open market purchase. What happens to the quantity of non-borrowed reserves and the federal funds rate? (HINT: In Microsoft Word, you can use the drawing toolbar to create lines to draw graphs.) Please do not cut and paste from the class notes. You can cut and paste a graph you have already drawn. How has the model changed since the Fed decided to pay interest on excess reserves in 2008? • Show less

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