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Suppose the market for reserves (the liquidity preference model) is in equilibrium at a federal funds rate at 5% a) Depict this situation graphically. b)

Suppose the market for reserves (the liquidity preference model) is in equilibrium at a federal funds rate at 5%

a) Depict this situation graphically.

b) Suppose the Federal Reserve then decides to start paying 1% interest on reserves banks. Graph effect this will have on equilibrium federal funds rate.

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