In March 2020, the RBNZ announced that it was dropping the Official Cash Rate (OCR) to 0.25%, a fall of 0.75 percentage points, in response to the COVID-19 pandemic.

a) What happens to the level of reserves commercial banks keep with the RBNZ when the OCR is reduced? Why does this happen? [Hint: think about the drop in the OCR in terms of incentives for commercial banks]

b) What happens to money supply when this occurs? Briefly explain why it increases or decreases.

c) What happens to the interest rate? Briefly explain why it increases or decreases.

d) What happens to the RR?

e) Draw the effects you have described in parts b) and c) in a money market diagram, labelling the interest rate and money supply at both the old and new equilibria.