The effectiveness of monetary policy can be seen through the…

The effectiveness of monetary policy can be seen through the supply and demand analysis of the reserves market. a)   Referencing a basic supply and demand graph of the reserves market, briefly explain why the graph is constructed the way it is along with the various interest rates. b)   Starting with a basic graph of the reserve market in which all the interest rates are different –  Explain graphically the changes to the federal funds rate and/or borrowings (if any) if the federal reserve makes an open market purchase.  Identify the type of policy (if any) and discuss its effectiveness? c)   Starting with a supply and demand graph of the reserves market where the federal funds rate and the discount rate are the same –  Suppose the Federal Reserve is trying to entice borrowing and chooses to lower the discount rate.  Explain graphically, the resulting impact to the federal funds rate and/or borrowings if any.  Identify the type of policy and if it was effective.

The Federal Reserve has the ability to manipulate/change the…

The Federal Reserve has the ability to manipulate/change the money supply by controlling the monetary base through reserve accounts. However, the banking industry plays a crucial role in the money supply process through multiple deposit creation. The multiple increase in deposits generated from an increase in the banking system’s reserves is called the simple deposit multiplier which is used in the formula to calculate the resulting change in the money supply. a)   Briefly explain the model highlighting its’ flaws and the three main players in the money supply process. b)   In the simple deposit expansion model, if the required reserve ratio is 20% and the Fed increases reserves by $100, checkable deposits can potentially expand by how much? c)   Based on the bank’s role in the money supply process, would a shift in demand from depository accounts to currency in hand increase or decrease the money supply? d)   Briefly explain your reasoning in part (c).