On a graph of the supply and demand for reserves representing a central bank using the channel system, if the demand curve intersects the leftmost horizontal portion of the supply curve, the equilibrium overnight rate equals
A) the interest rate on reserves.
B) the discount rate.
C) the repo rate.
D) none of the above.

Question

Quizplus · Accepted Answer

In a channel system used by a central bank, the supply of reserves is represented by a horizontal line at the level of the interest rate on reserves for the portion where reserves are abundant. When the demand for reserves intersects this leftmost horizontal portion, it indicates that reserves are in ample supply, and the equilibrium overnight rate will equal the interest rate on reserves, as banks have no incentive to lend or borrow at rates higher or lower than what they can earn directly from the central bank for holding reserves.

On a Graph of the Supply and Demand for Reserves