Suppose that in a market for reserves such as the one described in class the demand for reserves from the banking system is given by Rd = 500−50i where i denotes the nominal interest rate (the fed funds rate). Suppose the current target for the fed funds rate is 1.5%. What is the amount of non-borrowed reserves consistent with that target? How large must an open market operation be if the Fed increases its fed funds target to 2%?
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