be the discount window rate. Let NBR be the non-borrowed reserves held by banks 1 and 2. Denote each bank's optimal extra reserve rate by e" (i) when the interest rate in the interbank reserves market is i. Suppose 2% e(i) = i - ier for i > ier and e'(i) = {e : e > 1-r} for i = ier. Let r = 0.1, ier = 0.2%, id = 3%, D = D, + D2 = 80, and NBR = 208. 1. What is the current ? (Explain your answer.) 2. What is i if ier increases to 1.2% (while r, id, D and NBR remain unchanged)? (Explain your answer.) 3. What is i if i, decreases to 2.8% (while r, ier, D and NBR remain unchanged)? (Explain your answer.) 4. Can a change in NBR (while r, ier, id, and D remain unchanged) make i = 2%? If yes, find the corresponding value of NBR; if no, explain why. 5. Can a change in r (while ier, id, D and NBR remain unchanged) make i = 2%? If yes, find the corresponding value of r; if no, explain why.IV. Monetary policy and the interbank reserves market (10%) Suppose that there are only two commercial banks, 1 and 2. Let D., and En are bank n's demand deposits and extra reserves, respectively, n e {1, 2). Let r be the required reserve rate. Let i, 2 0 be the interest rate paid by the central bank to the commercial bank for holding extra reserves. Let i > far 3 be the discount window rate. Let NBR be the non-borrowed reserves held by banks 1 and 2. Denote each bank's optimal extra reserve rate by e"(i) when the interest rate in the interbank reserves market is i. Suppose 2%% e'(1) = 7 i - ler for i 2 fer and e'(1) = {e : e 2 1 -r) for i = ber. Let r = 0.1, ler = 0.2%%, id = 3%, D = D1 + D, = 80, and NBR = 208. 1. What is the current ? (Explain your answer.) 2. What is i if fer increases to 1.2% (while r, , D and NBR remain unchanged)? (Explain your answer.) 3. What is i if i, decreases to 2.8% (while r, fer, D and NBR remain unchanged)? (Explain your answer.) 4. Can a change in NBR (while r, fer, is, and D remain unchanged) make i = 2%? If yes, find the corresponding value of NBR; if no, explain why. 5. Can a change in r (while fer, is, D and NB R remain unchanged) make i = 2%? If yes, find the corresponding value of r; if no, explain why