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Figure E6.1a: Determining the Policy Rate in a Scarce Reserves System
This figure illustrates the mechanism for setting the policy interest rate in a traditional monetary policy framework where commercial bank reserves are scarce. The policy rate is determined at the intersection of the downward-sloping demand curve for reserves and the supply of reserves, which is represented by a vertical line controlled by the central bank. By adjusting the supply of reserves (shifting the vertical line), the central bank can steer the policy rate to its target level.
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Figure E6.1a: Determining the Policy Rate in a Scarce Reserves System
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