Refer to the figure above. If demand for overnight funds in the graph should increase by $50 billion at each and every point on the demand curve, but the Federal Reserve wants to keep the target rate at 5.0 percent, what will be the new equilibrium quantity of reserves?
A) $100 billion
B) $150 billion
C) $200 billion
D) $250 billion

Question

Refer to the figure above. If demand for overnight funds in the graph should increase by $50 billion at each and every point on the demand curve, but the Federal Reserve wants to keep the target rate at 5.0 percent, what will be the new equilibrium quantity of reserves?
A) $100 billion 
B) $150 billion 
C) $200 billion 
D) $250 billion

Quizplus · Accepted Answer

When demand for overnight funds increases by $50 billion at each and every point on the demand curve, the demand curve shifts to the right by $50 billion. In order to keep the target rate at 5.0 percent, the Federal Reserve would need to increase the supply of reserves until it intersects with the new demand curve at the same point as before. In this case, the new equilibrium quantity of reserves would be $200 billion, which is the point where the original demand curve intersects with the new supply curve. Therefore, the correct answer is C) $200 billion.

Refer to the Figure Above