Monetary policy and the market for bank reserves

Suppose the federal funds rate is not close to zero, risk spreads are roughly constant so that different interest rates rise and fall together, and banks are not holding many excess reserves. Federal Reserve open-market operations are done mostly in Treasury bills. Such economic conditions are referred to as "normal times."

Suppose the Federal Reserve implements an expansionarymonetary policy by bonds through open-market operations.

The following graph shows the demand and supply of bank reserves.

On the graph, show the effect of the Fed's expansionary monetary policy by shifting one or both of the curves.

Note: Select and drag one or both of the curves to the desired position. Curves will snap into position, so if you try to move a curve and it snaps back to its original position, just drag it a little farther.