Edited by Franklin G. Mixon and Richard J. Cebula
Chapter 2: A classroom federal funds market experiment
In a classroom experiment, students represent banks that borrow or lend in the federal funds market. As students negotiate loans with each other, they see how Federal Reserve open market operations affect the interest rates on their loans. Participating in the experiment vividly demonstrates why the removal of banking reserves via open market sales raises the federal funds rate and why the addition of banking reserves via open market purchases lowers the federal funds rate. The experiment uses a non-computerized double oral auction format and takes about 45 minutes to run. In the follow-up assignment, students analyse the data generated by the class. The experiment can be used in a money and banking or macroeconomics course, with 9-100 students.
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