M&B3 3rd Edition by Dean Croushore

Exercise 3

Suppose that the demand for reserves when the federal funds rate exceeds the interest rate on reserves is given by

where i is the federal funds rate in percent and D is expressed in billions of dollars. Suppose that the Fed supplies $28.0 billion in nonborrowed reserves and discount loans for business needs are $1.5 billion. Suppose that the primary credit discount rate is currently set at 6 percent and the interest rate on reserves is 2 percent.
a Calculate the equilibrium federal funds rate, reserves, and the amount of discount loans for profit.
b Suppose that the Fed reduces the supply of nonborrowed reserves to $26.0 billion. Now calculate the equilibrium federal funds rate, reserves, and the amount of discount loans for profit.