Explain the shapes of the demand curve for reserves and the supply curve of reserves
What will be an ideal response?
The demand curve for reserves shows the relationship between the quantity of reserves demanded and the federal funds rate. It is a downward sloping curve. This is because a higher federal funds rate increases the cost of holding reserves and reduces the quantity of reserves demanded by optimizing banks. The supply of reserves is determined by the central bank of a nation. Hence, it is vertical.
You might also like to view...
Which of the following statements applies to a single-price monopolist?
A) In order to maximize profits, the monopolist will produce an amount of output that lies in the elastic range of its demand. B) In order to maximize profits, the monopolist will produce an amount of output that lies in the inelastic range of its demand. C) In order to maximize profits, the monopolist will produce where its demand is unit elastic. D) In order to maximize profits, the monopolist will produce an amount of output in the inelastic range of its supply.
The Fed seldom uses the reserve requirement ratio to influence the money supply. What is the reason for this?
A) It is difficult and costly for the Fed to monitor compliance. B) Frequent manipulation of reserve requirements would require bankers to constantly adjust their lending policies to changing requirements, which could be destabilizing for financial markets. C) The Fed would like to discourage banks from making loans indiscriminately and therefore sets just one standard. D) Reserves in excess of a certain amount will not be covered by the Federal Depository Insurance Corporation.