The Federal Funds Market Jill Student Jack Deskoccupier Dan Intheclouds Joanie Willgraduatesoon Austrian Economics May Term 2015 Professor Hal Snarr Westminster.

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Presentation transcript:

The Federal Funds Market Jill Student Jack Deskoccupier Dan Intheclouds Joanie Willgraduatesoon Austrian Economics May Term 2015 Professor Hal Snarr Westminster College

2528R DRDR i ff 5 2 The Federal Funds Market Demand for reserves – The lower the federal funds rate (i ff ), the lower the opportunity cost of holding reserves and the greater than quantity of excess reserves held.

28 DRDR i ff 2 The Federal Funds Market Demand for reserves – The lower the federal funds rate (i ff ), the lower the opportunity cost of holding reserves and the greater than quantity of excess reserves held. – Q of reserves increases if the rrr is raised R

3028 DRDR i ff 2 The Federal Funds Market Demand for reserves – The lower the federal funds rate (i ff ), the lower the opportunity cost of holding reserves and the greater than quantity of excess reserves held. – Q of reserves increases if the rrr is raised R

3028 DRDR i ff 2 The Federal Funds Market Demand for reserves – The lower the federal funds rate (i ff ), the lower the opportunity cost of holding reserves and the greater than quantity of excess reserves held. – Q of reserves increases if the rrr is raised, checking deposits increase R

3028 DRDR i ff 2 The Federal Funds Market Demand for reserves – The lower the federal funds rate (i ff ), the lower the opportunity cost of holding reserves and the greater than quantity of excess reserves held. – Q of reserves increases if the rrr is raised, checking deposits increase, or a banking shock occurs R

The Federal Funds Market i ff 3 Supply of reserves – The horizontal section is determined when the Fed sets the discount rate (i d = 3%). R

The Federal Funds Market 28 i ff 3 Supply of reserves – The horizontal section is determined when the Fed sets the discount rate (i d = 3%). – The vertical section is the sum or borrowed reserves (R b = $25b) and non-borrowed reserves (R n = $3b) R

SRSR The Federal Funds Market 28 i ff 3 Supply of reserves – The horizontal section is determined when the Fed sets the discount rate (i d = 3%). – The vertical section is the sum or borrowed reserves (R b = $25b) and non-borrowed reserves (R n = $3b) R

SRSR 28 i ff 3 DRDR The Federal Funds Market Equilibrium in normal mode – It is determined by the intersection of supply and demand. R

SRSR 28 i ff 3 DRDR The Federal Funds Market Equilibrium in normal mode – It is determined by the intersection of supply and demand. – Equilibrium quantity of reserves equals $28b R

SRSR 28 i ff 2 3 DRDR The Federal Funds Market Equilibrium in normal mode – It is determined by the intersection of supply and demand. – Equilibrium quantity of reserves equals $28b – Equilibrium federal funds rate equals 2% R