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a) (10 points - 5 for diagram, 5 for explanation) Now let's pretend that the Fed had acquired the tools of the discount rate and interest rate on
a) (10 points - 5 for diagram, 5 for explanation) Now let's pretend that the Fed had acquired the tools of the discount rate and interest rate on reserves and use them to try to limit the fluctuations in the federal funds rate. In particular, they set the discount rate at 7.5% and the rate they pay on reserves at 6.5%. Draw a new reserve diagram and show and explain why points A and B would not occur in this new ('pretend') regime. Be sure to explain why the funds rate would never rise as it did at point A and it would never fall as it did at point B. Label the new market clearing points as points A' and B' respectively. (5 points for correct and completely labeled diagram
