Suppose the target range for the federal funds rate is 1.5 to 2 percent but that the equilibrium federal funds rate is currently 1.7 percent. Assume that the equilibrium federal funds rate falls (rises) by 1 percent for each $120 billion in repo (reverse repo) bond transactions the Fed undertakes. If the Fed wishes to raise the equilibrium federal funds rate to the top end of the target range, will it repo or reverse repo bonds to non-bank financial firms? How much will it have to repo or reverse repo?

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Business

Sarah May

31 January, 21:24

Suppose the target range for the federal funds rate is 1.5 to 2 percent but that the equilibrium federal funds rate is currently 1.7 percent. Assume that the equilibrium federal funds rate falls (rises) by 1 percent for each $120 billion in repo (reverse repo) bond transactions the Fed undertakes. If the Fed wishes to raise the equilibrium federal funds rate to the top end of the target range, will it repo or reverse repo bonds to non-bank financial firms? How much will it have to repo or reverse repo?

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Rosemary Jenkins · Answer 1

24 billion in repo.

Explanation:

1.7-1.5=0.2%

If 1% fall = 120 billion in repo.

0.2% fall = ? billion in repo

(0.2%*120) / 1% = 24.

24 billion in repo.