Consider two economies: Discretia and Fixedland. In both countries, banks hold excess reserves. In Discretia, banks hold less in excess reserves as the interest rate increases. In Fixedland, all banks...

Consider two economies: Discretia and Fixedland. In both countries, banks hold excess reserves. In Discretia, banks hold less in excess reserves as the interest rate increases. In Fixedland, all banks always hold exactly 5% of their checking deposits as excess reserves, regardless of the interest rate. Use the simple model of the money market that we used in class. Suppose the two countries have identical money demand curves, and that the equilibrium interest rate is initially the same in both countries. Then, the central banks of Discretia and Fixedland simultaneously conduct contractionary open market operations of equal magnitude. Will the contractionary open market operation have a greater short-run effect on the interest rate in Discretia or Fixedland? Explain with reference to just one graph.