Suppose the federal funds rate target is 2.5%, the interest paid on excess reserves is 0.5% and the reserve requirement is 12%. The discount rate is set according to current practice

Illustrate the market for reserves, clearly labeling the market equilibrium (iff1* and R1*), relevant interest rates, and reserves (borrowed, BR and/or nonborrowed, NBR). You must clearly label the axes, curves, equilibrium, and numerical values for the federal funds rate, the interest on reserves, and the discount rate to receive credit for this question. Label the equilibrium point A.

Assume the total level of reserves in the banking system is equal to $8000. What portion of total reserves is held in nonborrowed reserves? What portion in borrowed reserves? Explain how you know, both in terms of your graph and intuitively.

When the financial crisis began in 2007, there was a large increase in the banks’ need for liquidity on their balance sheets. Does this affect reserve demand or reserve supply? Explain briefly why.

The change in c) resulted in a large change in borrowed reserves. Illustrate how this change affects the market for reserves, clearly labeling (where applicable) the new market equilibrium (iff2* and R2*), borrowed reserves (BR2) and nonborrowed reserves (NBR2). You must clearly label the new curve(s), and equilibrium values to receive credit for this question. Assume the Federal Reserve does not respond to maintain the target. Illustrate the effect of the change. Label the equilibrium point B.