MONEY AND BANKING CHAPTER 15

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Question#7: Using the supply and demand analysis of the market for reserves, show what happens to the federal funds rate, holding everything else constant, if the economy is surprisingly strong, leading to an increase in the amount of checkable deposits.

A rise in checkable deposits will leads to a rise in the required reserves at any given interest rate, and this will therefore shift the demand curve to the right. However if the federal funds rate is below the discount rate, this will then leads to a rise in the federal funds rate. Also If the federal funds rate is at the