Question

Suppose initially, vertical portion of the supply curve intersects the demand curve on its downward portion. Graphically show the case where an increase in the interest rate paid on reserves does NOT lead to a change in the equilibrium fed funds rate.

Answer 1

Kindly Check Explanation section

Step-by-step explanation:

NB: Since, we are to show graphically and there is need to draw, kindly check the attached file for the graph that shows the case where an increase in the interest rate paid on reserves does NOT lead to a change in the equilibrium fed funds rate.

The concept of RESERVE is very important in accounting. The amount of money that is saved up from the normal profit of a business organization or company or a country which is being used for further efficient Production In the long run is known as RESERVE.

For a country, it is the central bank in such country that pays the interest with regards to reserves that are in excess.

It must be noted that as the rate of supply increases , the rate of at which the value of price is also reduces. Hence, when there is an increase in the interest rate paid on reserves the whole demand does not shoot up.

NB: The initial equilibrium is at E( the point at which D(A) and P(A) meets and an increase causes it to meet at the point D(B) and P(B).