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b. Use the Market for Reserves framework to analyze each of the following scenarios. Treat each...

b. Use the Market for Reserves framework to analyze each of the following scenarios. Treat each scenario separately (i.e. draw a separate fully-labeled graph for each in order to get full credit). Assume that the market is initially in equilibrium. Important: Make sure that your graphs clearly show changes in the equilibrium federal funds rate, changes in the equilibrium level of reserves, and any shifts in the demand or supply curves. Explain in one sentence what your graph is showing. i. Commercial banks increase their demand for reserves.

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Answer #1

Increase in demand for reserves shifts demand curve rightward, increasing both interest rate and equilibrium quantity of reserves.

In following graph, interest rate (r) and quantty of reserves (Q) are depicted along vertical and horizontal axis, respectively. D0 and S0 are initial demand and supply curves for reserves, intersecting at point A with initial interest rate r0 and quantity of reserves Q0.

Higher demand for reserves shifts D0 rightward to D1, intersecting S0 at point B with higher interest rate r1 and higher quantity of reserves Q1.

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