Draw graphs and explain in no more than five sentences the effects on the equilibrium real interest rate (r) and equilibrium quantity demanded of money (M/P) of the following monetary policy, or of the change in the market for real goods and services. Assume that cash and government bonds are the only financial assets in the money or financial market. Note that M is nominal money supply, P is aggregate price level of real goods and services, and Y is aggregate real income, real output, or real GDP.

1. The central bank lowers the reserve requirement ratio on banks at time t = 2. All other variables are assumed to be constant (i.e. P = P₁= P₂, Y=Y₁=Y₂). Assume that the initial equilibrium real interest rate is r₁, and equilibrium quantity demanded of real money is M₁/P₁at time t = 1.