1. Suppose currently in country XY the interbank rate (federal funds rate) is 3.0% as set by the current demand and supply in the market for reserves. The discount rate is set at 4%. The central bank pays 2.0% interest on reserves held by commercial banks. The current required reserve ratio is 20%, which commercial banks complain is too high.

A-Based on the above information provided, sketch a well labeled diagram of the market for reserves to show the current equilibrium position

B-Suppose the central bank wishes to reduce the required reserve ratio (say to 10%) but wants to keep the interbank rate at 3%. Briefly discuss how (and show in separate market for reserves diagrams) how the central bank could use (i) open market operations and (ii) interest on reserves to ensure the interbank rate remains at 3%