Discussion Question: Suppose the prevailing federal funds rate is 2%, the discount rate is 4%, and the current amount of bank reserves is $2 million.

Using a graph for the market for federal reserves, illustrate the impact of the Fed implementing a contractionary policy by selling $1 million worth of government securities in open market operations.

Using a graph for the market for loanable funds, illustrate the impact of this same policy.

Poll Question: if the Fed decreases the required reserve ratio, what happens to the amount of reserves that banks have to hold?What happens to the size of the multiplier?