Suppose the target range for the federal funds rate is 1.5% to 2.0% but that the equilibrium federal funds rate is currently 1.70%. Assume that the equilibrium federal funds rate falls by 1%for each $120 billion in repo bond transactions and rises by 1% for each $120 billion in reverse repo bond transactions the Fed undertakes. Requirements:
(a) If the Fed wishes to raise the equilibrium federal funds rate up to the top end of the target range, will it repo or reverse repo bonds to non-bank financial firms?
(b) How much will it have to repo or reverse repo?