Question: Draw the supply and demand diagram for reserves with the curves intersecting on the downward sloping part of the demand curve - diagram A. Draw a second graph with the intersection taking place on the horizontal part of the demand curve - diagram B. Explain the difference between the two diagrams?
Suppose both diagrams, A and B, represent a specific state of the world (economy). From a monetary policy standpoint, which state of the world would the FOMC prefer?