Suppose the reserve requirement is 10% and that the Federal Reserve has established a 6% target for the federal funds rate. The federal funds market and the money market are in equilibrium as shown in the graphs below. a. Suppose the Federal Reserve decides it needs to lower the federal funds rate from 6% to 5%. It will require a $20 billion open market purchase to achieve this goal. Show this change in the supply of reserves curve and indicate the new quantity of reserves in the federal funds market. Instructions:
Draw a new supply of reserves curve. Use the tool provided "New Quantity' to plot the new equilibrium quantity of reserves in the federal funds market.
b. If the Federal Reserve makes an open market purchase of $20 billion, the total money supply will increase by $ billion.
c. When the total money supply increases, there will be an adjustment to the interest rate in the money market. Use the money market graph and show the change in the money supply and interest rates in the money market.
Instructions: Draw a new money supply curve. Use the tool provided 'New Equilibrium' to plot a new equilibrium and interest rate.
d. When the Fed lowers the target federal funds rate, reserves , causing the money supply to , and interest rates (for borrowing and lending money) will .