The Market for Reserves and the Federal Funds Rate

iff: Federal Funds rate ( rate for Overnight loans/ loans from other
banks to balance)
id: Discount rate (rate for Discount Loans from Central Bank)
ier: Interest rate on reserves
Demand for Reserves:
- Excess reserves are insurance against deposit outflows
o The cost of holding these is the interest rate
that could have been earned
o iff - ier > 0 => demand: iff, R (demand,
downward sloping)
o iff - ier < 0
- Supply in the Marker for Reserves
o iff < id = would rather borrow from other banks
supply curve is vertical/flat/fixed
o iff > id = would rather borrow from the Central
bank
perfectly elastic supply