Answer to Question #43663 in Macroeconomics for Tina
2) Draw a supply-demand diagram of the Federal funds market which illustrates the effects of a massive treasury bill sale by the Fed in the open market.
3) If banks desire to increase their lending, but the Federal Reserve is not adding reserves to the banking system, what will happen to the level of short term interest rates? Explain your answer carefully.
4) "Sweep" accounts are combination checking/money market accounts which large banks currently offer to their corporate customers. These accounts sweep just enough funds out of the money market portion of the account to prevent checks written on the checking part of the account from bouncing. Suppose that banks suddenly made these accounts available to households. Draw a supply/demand diagram of the federal funds market to show the effect on the federal funds rate if the Fed did nothing. What action in the open market would the Fed have to take to maintain its existing interest rate target under these circumstances?
5a) Explain carefully why interest rates on each of the following short-term financial instruments will be closely tied to the level federal funds rate: short-term bank CDs, short-term Treasury bills, short-term commercial paper.
5b) Why is the yield on short-term Treasury bills usually less than the federal funds rate?
6) Suppose households and small firms withdrew funds from banks in response to rumors circulating that a computer virus would destroy banks customer account databases, or the recent events of financial meltdown in the Wall Street. What action would the Fed have to take in the open-market to maintain its existing fed funds target rate?
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