You are given the following information about the market for reserves. The current federal funds rate is 1.5%, the discount rate is 2.0%, the interest rate paid on reserves is 1.0%, and the Fed owns $600 billion in government securities.

a. Graphically illustrate the market for reserves .

b. Suppose banks are optimistic about the economy after the election. As a result, banks are planning to increase lending. What would happen in the market for reserves? What would happen to the equilibrium federal funds rate?

c. Suppose the Fed wanted to sterilize (negate) the impact of the change on the federal funds rate from the previous question. What action would they need to take ?