1. For this part think about Demand and supply in the market of Reserves. a. (3 points) Who are on the demand side of the market?

1.      For this part think about Demand and supply in the market of Reserves.

a.      (3 points) Who are on the demand side of the market?

b.      (2 points) Who are on the supply side of the market?

c.      (2 points) Assume equilibrium federal funds rate is strictly between discount rate and interest on reserves. Draw demand, supply and equilibrium for the market of reserves below. (Label axis, curves and equilibrium point)

d.      (2 points) Draw NEW supply and demand graph for reserves on which equilibrium federal funds rate equals discount rate but is above interest on reserves. (again label axis, curves and equilibrium point)

e.      (3 points) What happens on the First graph when discount rate drops? Show shift and explain how equilibrium federal funds rate and equilibrium quantity of reserves changes. (Write explanations below but make shifts on the graph for question (c))

f.       (3 points) What happens on the Second graph when discount rate drops? Show shift and explain how equilibrium federal funds rate and equilibrium quantity of reserves changes. (Write explanations below but make shifts on the graph for question (d))