How does the interest paid on reserves set a floor for the federal funds rate?
What will be an ideal response?
If the federal funds rate was lower than the interest on reserves, banks could borrow from one another at a low rate and earn a risk-free return on reserves. Competition between banks to carry out the risk-free arbitrage would force the federal funds rate up to the interest rate on reserves.
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Suppose the Chinese central bank wants to keep the exchange rate of its currency value constant over time. An increase in the demand for Chinese goods by American residents will lead the Chinese central bank to
A) coordinate with the U.S. central bank in order to increase the supply of the U.S. dollar in the foreign exchange market. B) increase the demand for the Chinese currency in the foreign exchange market. C) use its dollar reserves to buy the Chinese currency in the foreign exchange market. D) sell the Chinese currency in exchange for U.S. dollars in the foreign exchange market.
A widget costs $1000 in the US and CAD$1200 in Canada. The current exchange rate is 1USD=1.09CAD. Given purchasing power parity, the Canadian dollar would_______to equilibrate prices
a. Appreciate b. Depreciate c. Not change d. None of the above