Assume that a bank does not hold any cash reserves (i.e., invests all the funds it receives in deposits) and operates at a zero profit (i.e., the return earned on the amount it lends is equal to the interest rate which it pays depositors). Suppose further that the bank can attract deposits according to the following supply function that is linear in the interest rate that it pays. That is,
|
Interest rate offered on deposits |
Amount of funds from deposits |
|
6% |
$1 |
|
12% |
$2 |
|
18% |
$3 |
|
and so on |