1. [14pts] Use the graph to answer the following questions

Federal Funds Rate

Quantity of Reserves, R

1. Label the Reserves Supply Curve, the Reserves Demand Curve, the equilibrium Federal Funds Rate, the discount rate, the rate paid on excess reserves, and the quantity of Non-borrowed Reserves (6pts)

2. In your own words, explain the shapes of the RS and RD curves? (8pts)

2. [10pts] Use the graph below to illustrate the effects of an open market sale. Then explain why this would be done, what the Fed is trying to accomplish, and how the policy should work to achieve that goal.

Federal Funds Rate

Quantity of Reserves, R

3. [16pts] Given the following scenarios, what should does the Taylor Rule dictate the Fed should do to the Federal Funds Rate?
   1. Potential output declines while actual output growth is unchanged?
   2. The Fed revises the inflation target upwards
   3. A supply shock causes the inflation rate to rise by 1% and output to fall by 1%
   4. Unemployment falls due to an economic expansion