Place your mouse cursor over the RD label to drag the Reserve Demand curve inward or outward to replicate a shock to money demand.
You may drag on the magenta Triangle to alter the Reserve Supply position or on the green Triangle to alter the Federal Funds (target) Rate.
Press the Reserve Supply Targeting button or the Interest Rate Targeting button to see the appropriate adjustment(s).
Press Reset to start over.
Questions:
Suppose the Federal Reserve targets the federal funds rate and the economy experiences an outward shift in reserve demand. How does the economy return to equilibrium?
Suppose, instead, the Federal Reserve targets the quantity of reserves in the market and the economy experiences an outward shift in reserve demand. What adjustment does the economy make in this case?
What would happen to the federal funds rate if there were a fall in reserve demand?
Suppose the Federal Reserve announces an increase in its target for the federal funds rate. Show this change on the graph by placing your mouse over the green triangle and dragging it upward. How can the Fed bring about such a change in its interest rate target?
