Question

Suppose the target range for the federal funds rate is 2 to 2.5 percent but that the equilibrium federal funds rate is currently 2.3 percent. Assume that the equilibrium federal funds rate falls (rises) by 1 percent for each $120 billion in repo (reverse repo) bond transactions the Fed undertakes. If the Fed wishes to raise the equilibrium federal funds rate to the top end of the target range, will it repo or reverse repo bonds to non-bank financial firms

Answer 1

The answer is 24 billion

Step-by-step explanation:

Solution: The reverse repo rate is an instrument monetary policy where the commercial banks lends money to the central banks. this method is used to control the the money supply in quantities.

The goal for the federal government rate of funds has has 2.5 percent at upper end. the equilibrium federal funds are 2.5 percent.

The repo falls by 1 percent, when the federal government takes repo transactions of 120 billion

A repo effect is undertaken for the increase of Federal funds

Now,

The difference between upper end of rate and equilibrium rate is = 2.5% - 2.3% = 0.2%

now,

If 1% = 120 billion then we solve for 0.2%

The rate of reverse repo transaction = 120 billion * 0.2/1% = 24 billion.

Therefore, If the Fed wishes to raise the equilibrium federal funds rate to the top end of the target range, will it repo or reverse repo bonds to non-bank financial firms is 24 billion