Financial Markets and Institutions (2-downloads)

causes the federal funds rate to fall, whereas an open market sale causes

the federal funds rate to rise.

However, if the supply curve initially intersects the demand curve on its flat section,

as in panel (b) of Figure 10.2, open market operations have no effect on the federal funds

rate. To see this, let’s again look at an open market purchase that raises the quantity

of reserves supplied, which shifts the demand curve from 

to 

, but now where ini-

tially 

. The shift in the supply curve moves the equilibrium from point 1 to 

point 2, but the federal funds rate remains unchanged at i

er

because the interest rate