(answered) – 1) (20 points) Suppose reserve demand is given by: Rd = 450 – 50DescriptionSolution downloadThe QuestionPlease complete the attached. Show all work and formulas1) (20 points) Suppose reserve demand is given by:Rd = 450 – 50 iffand Reserve supply is given by:Rs = 300a) (3 points) Solve for the equilibrium federal funds rate. Draw a reserve marketdiagram below labeling this initial equilibrium as point A. (10 points for correctand completely labeled diagram)b) (4 points) Suppose that the Fed decides that the economy needs a little boost andthus decides to lower the federal funds rate target by 50 basis points (.5 %).Explain exactly how this change in policy would be implemented.c) (3 points) Now solve for the new reserve supply associated with this new target,assuming that reserve demand is constant (stable) and label on your diagram aspoint B.2) (20 points)a) We go back in time to the very end of 1990 where the US economy was officiallyin a recession. Use the diagram below and the information in the diagram todraw a reserve market diagram mapping points A and B from the time series(FRED) diagram to your reserve market diagram (point A, 12/26/90, point B12/31/90). Assume, as we did in the lecture, that the source of this deviation fromtarget was reserve demand being different than the Fed’s forecast of reservedemand. (10 points for correct and completely labeled diagram)1b) (10 points – 5 for diagram, 5 for explanation) Now let’s pretend that the Fed hadacquired the tools of the discount rate and interest rate on reserves and use themto try to limit the fluctuations in the federal funds rate. In particular, they set thediscount rate at 7.5% and the rate they pay on reserves at 6.5%. Draw a newreserve diagram and show and explain why points A and B would not occur in thisnew (‘pretend’) regime. Be sure to explain why the funds rate would never rise asit did at point A and it would never fall as it did at point B. Label the new marketclearing points as points A’ and B’ respectively. (5 points for correct andcompletely labeled diagram)2
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