2. From 1979 to 1982, the FOMC used money growth as an intermediate target of MP. To do so, the committee instructed the Open Market Trading desk at the NY Fed to target the level of non-borrowed reserves in the banking system.
a. What was the justification for doing so?
b. Explain what happened to interest rates.
c. Why did this happen?
d. What did the Fed ultimately do?
4. Suppose the Fed reduced the reserve requirement. If we assume that the Fed wished to maintain a constant target FF rate, and that the demand for excess reserves remains unchanged, then how would the Open Market Trading Desk at the NY Fed react to this decline in the reserve requirement?
5. Assuming the Fed has a “point’ target for the FF rate rather than a target range, what impact might paying interest on reserves have on volatility in the market for reserves? Why?
6. During the holiday season, when the public’s holdings of currency increase, what defensive open market operations typically occur? Why?
7. “The federal funds rate can never be above the discount rate.” Is this statement true, false, or uncertain? Explain your answer.
8. “The federal funds rate can never be below the interest rate paid on reserves.” Is this statement true, false, or uncertain? Explain your answer.
10. Why is it that a decrease in the discount rate does not normally lead to an increase in borrowed reserves? Use the supply and demand analysis of the market for reserves to explain.