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Concept Introduction:
Reserves: These are the liquid assets which are kept by commercial banks, government to meet the emergency demand.
Federal fund rate: It is the rate at which the depository institutions lend funds to other depository institutions, overnight.
Open market operations: These are conducted by the central bank, which involves buying and selling of bonds in the open market.
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Explanation of Solution
The market for reserves is depicted in the diagram. The reserve demand is downward sloping which indicates that as the interest rates (federal fund rates) goes down, the demand for reserves increases because now the cost of borrowing will be less. However, the supply for reserves is vertical curve which implies that the supply of reserves is governed by the Federal Reserve (Central Bank).
The intersection of the
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Economics of Money, Banking and Financial Markets, The, Business School Edition (5th Edition) (What's New in Economics)
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