Consider an overnight market. The upper limit of the CB's (Central Bank's) operating band is 1.75 and the lower limit is 1.25. Suppose, the demand and supply functions for settlement balances (reserves) are expressed:

Demand: i = 2.75 -0.01Q for i>i-er, Q-demanded is infinity for any i less than or equal to i-er.

Supply: Q = 140; Q-supplied is infinity by CB if i is greater than or equal to i-b.

Where i stands for overnight rate, Q stands for quantity of settlement balances, i-er stands for overnight rate paid by CB on banks' excess reserves, and i-b stands for bank rate that CB charges banks when they want to borrow from CB. CB's objective is to keep the overnight rate within the operating band.

1. What is the equilibrium overnight rate within the operating band? 1p

2. If CB wants the overnight rate to be at its target rate, does the CB need to go for SPRAS or SRAs, by how much?

2p

3. If banks expect an unusually large increase in withdrawals from chequing deposit accounts in the future and it causes equilibrium overnight rate to be at 1.6, which one will change - demand or supply, by how much?