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Question
Week 10 worksheet.dvi
1. Suppose the market for reserves (the liquidity preference model) is in equilibrium at a federal funds rate of 5%.
(b) Suppose the Federal Reserve then decides to start paying 1% interest on the reserves banks keep. Graph the effect this will have on the equilibrium federal funds rate.
Week 9 worksheet
1. Suppose the market for reserves (the liquidity preference model) is in equilibrium at a federal
funds rate of 5%.
(a) Depict this situation graphically.
(b) Suppose the Federal Reserve then decides to start paying 1% interest on the reserves
banks keep. Graph the effect this will have on the equilibrium federal funds rate.
1
LRP C
Ï€
4%
3%
P C2
0
3%
5%
P C1
u
Figure 1: Phillips Curves
2. For this question, refer to ï¬gure 1. The Phillips Curve is currently given by P C1 , and the
unemployment rate is current 5%. If the Fed engages in an open market purchase to reduce
the unemployment rate to 3%, in the short run, this will lead to what inflation rate?
3. For this question, refer to ï¬gure 1. The Phillips Curve is currently given by P C1 , and the
unemployment rate is current 5%. If the Fed attempts to maintain unemployment at 3%,
what will happen to the Phillips curve? Explain why.
