In 2009, there were some economists who recommended that the Fed should pay a negative interest rate on banks' reserves - in effect, that was to charge a storage fee when holding reserves for banks. Sweden actually implemented this in mid-2009. Assuming that banks do not hold any additional reserves in cash (i.e. all banks' reserves are held in their reserve accounts in the federal system):

a. How would you expect the money supply and interest rate to change when interest rate paid on reserves becomes negative? Explain briefly. (6 marks)

b. Would a negative interest rate paid on reserves possibly lead to a negative federal funds rate? Why or why not? (4 marks)