PLEASE PROVIDE VERY DETAILED ANSWERS AND CLEAR DIAGRAMS.

The Financial Market: Reserves and Money Supply

Suppose that the demand for central bank money is 8$Y (0.3 i) with 8 = 0.2 the reserve ratio that banks are required to hold, $Y = 500. and the supply of money is M = 2083. i) Draw the money supply-money demand diagram in equilibrium. Label the axes and the equilibrium interest rate and money. i1) Suppose that the money supply is fixed. but the central bank decides to increase the reserve ratio of banks to 8 = 0.4. Describe what happens to the interest rate. Why? ii1) Draw the new equilibrium on the diagram of question 1). iv) To what other policy does the change in the reserve ratio look like - an expansionary or a contractionary monetary policy? Money Supply and Demand Equilibrium (Original) 30 - -- MD (0=0.2) MS (Fixed at $20) 25 Equilibrium (i=0.10, MS/MD=$20) 20 Money ($) 15 10 5 0.00 0.05 0.10 0.15 0.20 0.25 0.30 Interest Rate (i)Money Supply and Demand Equilibrium (After Increasing 6 to 0.4) MD New (6=0.4) MS (Fixed at $20) 60 50 o Money ($) S w Equilibrium S/MD=%$20) N o 10 0.00 0.05 0.10 015 0.20 0.25 0.30 Interest Rate (i)