Fed Funds Rate 7.00% 6.50% 6.00% 5.50% 5.00% 4.50% 4.00% 3.50% 3.00% 2.50% 2.00% 1.50% 1.00% 0.50% 0.00% $130 Bank Excess Reserves ($Billion) Consider the above graph that shows demand for excess reserves by the banking system as a whole. The discount rate is 4.5 percent and the Fed pays an interest of 1.50 percent on excess reserves. Currently banks as a whole are holding an excess reserve of $70 billion. This means that the equilibrium fed funds rate is percent. The Fed increases the supply of excess reserves by $20 billion through an open market purchase of bonds. As a result, the equilibrium fed funds changes to percent. The Fed increases the supply of excess reserves by another $30 billion through another round of an open market purchase. As a result the equilibrium fed funds rate changes to percent. –