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(a) Describe the main characteristics of the Klein-Monti model for the determination of bank interest rates and the main limitation of using the Klein-Monti model

(a) Describe the main characteristics of the Klein-Monti model for the determination of bank interest rates and the main limitation of using the Klein-Monti model for the determination of the loan and deposit rates. (b) Using the Klein-Monti model show graphically how the interest rates for deposits and loans are determined in equilibrium. In addition, show how the optimal level of deposits and loans are determined using the same graphical analysis. Now, assume that there is an exogenous reduction in the interest rate paid by the treasury bills. Show graphically how your previous results may change. Discuss your findings and implications.

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