How changes in the tools of Monetary Policy Affect i*ff? - Open Market Operations: When i or = i* ff < i d

1) Please draw the initial market for reserve graph when i or = i* ff < i d. Indicate the equilibrium as "1". Label all the axis and curves.

Let' say there is an Open Market operation purchase (by the Fed)

2) What happens to which curve? Indicate any changes in the graph and label the new equilibrium as "2".

3) What happens to the non-borrowing reserve or the borrowed reserve?

(Hint: Let's assume that the amount of borrowed reserved will be determined by the discount rate.)

4) Therefore, what happens to the monetary base?

5) Base on your answer above, what happens to the money supply in the economy (M1)?