In addition to the required reserves (RR), commercial banks may want to hold interest-paying excess reserves (ER) with the central bank. The discussion on the money multiplier in your textbook assumes that the value of the excess reserve is given exogenously. Now assume that the decision of commercial banks to hold excess reserves depends on the market interest rate (e.g. the federal funds rate in the case of the USA).

1. a) How does the decision of commercial banks holding excess reserves depend on the market interest rate?

2. b) What is the implication for the money multiplier?

3. c) What is the implication for the supply of money?

4. d) Draw a graph of the money market, which takes into account that

   that banks excess reserves depend on the market interest rate.

[Word limit: 300 words]