On a Graph of the Supply and Demand for Reserves

question 71

Multiple Choice

On a graph of the supply and demand for reserves, if there is discount lending, what would the Fed have to do to lower the equilibrium federal funds rate?

• A) buy bonds
• B) sell bonds
• C) lower the discount rate
• D) none of the above

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Definitions:

Capital Market Line

A theoretical line representing the risk versus return of the market of all investable assets, assuming risk-free borrowing and lending rates.

Security Market Line

A representation of the capital asset pricing model which shows the relationship between risk (as measured by beta) and expected return of investments.

Expected Return

The anticipated profit or loss an investment is predicted to generate, acknowledging the potential for volatility and risk.

Beta

A means to compare the stability and risk factor of a security or portfolio relative to the market as a whole.