Use a Diagram of the Money Market to Illustrate and Identify

Use a diagram of the money market to illustrate and identify equilibrium in that money market. Explain what equilibrium means in terms of interest rates and the holdings of real money balances. Starting from equilibrium in your diagram, suppose banks decide it would be prudent to increase their desired reserve holdings and reserve ratio. Explain how this changes conditions in the money market. Illustrate the new equilibrium interest rate and holdings of real money balances. Explain the adjustment process that takes the money market from its initial equilibrium to the new equilibrium.