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Solved: Now assume that the Fed is following a policy of targeting the federal funds
Chapter 0, Problem 2(choose chapter or problem)
QUESTION:
Now assume that the Fed is following a policy of targeting the federal funds rate. What will the Fed do in the situation described in Question 1 to keep the federal funds rate unchanged? Illustrate with a diagram.
Questions & Answers
QUESTION:
Now assume that the Fed is following a policy of targeting the federal funds rate. What will the Fed do in the situation described in Question 1 to keep the federal funds rate unchanged? Illustrate with a diagram.
ANSWER:Step 1 of 2
The Fed can only fix the interest rate; otherwise, with the change in demand and supply, the interest rate also fluctuates. Hence, the intervention of the Fed is required to keep the interest rate fixed.