Use supply and demand analysis to demonstrate what happens to the federal funds rate if the Fed decreases the discount rate. Explain your answer. If there are two possibilities, be sure to create graphs for each.

There are two banks: High Capital Bank and Low Capital Bank. High Capital Bank has Reserves of 40 million, Loans of $180 Million, Deposits of 200 million. Low Capital Bank has Reserves of 40 million, Loans of 180 million and Deposits of 210 million.

a. How much bank capital does each bank have?

b. Suppose both incur 15 million in bad loans. What happens to each bank? Explain.