onsider the market for inter-bank reserves. Suppose the supply curve of non-borrowed reserves is 100. The supply of borrowed reserves = 50*(FF-DR). Let DR = .5. The demand for borrowed reserves is 150-100*FF.

(a) Draw the supply and demand curves for inter-bank reserves. What is the equilibrium federal funds rate? (b) Explain the upward sloping relationship between the federal funds rate- discount rate spread (FF-DR) and borrowed reserves. (c) If the Fed wants to raise the federal funds rate, how should it change the supply of non-borrowed reserves. Demonstrate on a graph. (d) If people suddenly stopped using paper currency (cash) in transactions, how would that affect the demand curve? (e) If there was better information processing so banks could predict their de- posit needs better, what would that do to the demand curve? Demonstrate on your graph. (f) Can the Fed set any interest rate it wants now? How might paying interest on reserves help? Demonstrate on your graph.