Scenario: The following figure shows the federal funds market. Assume that the market of reserves is in equilibrium at point (R₀, i₀).

-Refer to the scenario above.If the Fed uses a contractionary monetary policy,the new equilibrium quantity of reserves is ________ and the new federal funds rate is ________.

Question

Scenario: The following figure shows the federal funds market. Assume that the market of reserves is in equilibrium at point (R₀, i₀).
 
-Refer to the scenario above.If the Fed uses a contractionary monetary policy,the new equilibrium quantity of reserves is ________ and the new federal funds rate is ________.

Quizplus · Accepted Answer

Contractionary monetary policy reduces the supply of reserves. This will shift the supply curve of reserves to the left, resulting in a new equilibrium point at a higher federal funds rate and a lower quantity of reserves. Therefore, the new equilibrium point will be at point (R₂, i₂).

Scenario: the Following Figure Shows the Federal Funds Market