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Federal reserve bank sets an interest rate target

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Reference no: EM131224643

Suppose that money demand is given by:

MD = $Y (0.25-i) 

Where Y is $ 100 

a. If the federal reserve bank sets an interest rate target of 5%, what is the money supply the federal reserve must create?

b. If the fed reserve bank wants to increase i from 5 to 10%. What is the new level of money supply the fed must create?

c. What is the effect of the federal reserve balance sheet of the increase in interest rate from 5% to 10%

Reference no: EM131224643

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