Question

Bank Three currently has $500 million in transaction deposits on its balance sheet. The Federal Reserve...

Bank Three currently has $500 million in transaction deposits on its balance sheet. The Federal Reserve has currently set the reserve requirement at 8 percent of transaction deposits.

a.

If the Federal Reserve decreases the reserve requirement to 5 percent, show the balance sheet of Bank Three and the Federal Reserve System just before and after the full effect of the reserve requirement change. Assume Bank Three withdraws all excess reserves and gives out loans, and that borrowers eventually return all of these funds to Bank Three in the form of transaction deposits. (Do not round intermediate calculations. Enter your answers in millions rounded to the nearest dollar amount.)

Panel A: Initial Balance Sheets
Federal Reserve Bank
Assets Liabilities
  (Click to select)LoansReserve deposits at FedSecuritiesReserve accountsTransaction deposits $  million   (Click to select)SecuritiesLoansReserve accountsTransaction depositsReserve deposits at Fed $  million
Bank Three
Assets Liabilities
  (Click to select)LoansReserve accountsTransaction depositsReserve deposits at FedSecurities $  million   (Click to select)Reserve deposits at FedReserve accountsSecuritiesLoansTransaction deposits $  million
  (Click to select)Reserve deposits at FedLoansSecuritiesReserve accountsTransaction deposits million
Panel B: Balance Sheet after All Changes
Federal Reserve Bank
Assets Liabilities
  (Click to select)Transaction depositsLoansSecuritiesReserve deposits at FedReserve accounts $  million   (Click to select)Reserve accountsReserve deposits at FedSecuritiesTransaction depositsLoans $  million
Bank Three
Assets Liabilities
  (Click to select)LoansTransaction depositsReserve accountsSecuritiesReserve deposits at Fed $  million   (Click to select)Reserve deposits at FedSecuritiesTransaction depositsLoansReserve accounts $  million
  (Click to select)SecuritiesLoansReserve accountsTransaction depositsReserve deposits at Fed million
b.

Redo part (a) using a 10 percent reserve requirement. (Do not round intermediate calculations. Enter your answers in millions rounded to the nearest dollar amount.)

Panel A: Initial Balance Sheets
Federal Reserve Bank
Assets Liabilities
  (Click to select)LoansSecuritiesReserve accountsReserve deposits at FedTransaction deposits $  million   (Click to select)LoansTransaction depositsReserve deposits at FedSecuritiesReserve accounts $  million
Bank Three
Assets Liabilities
  (Click to select)Reserve deposits at FedLoansReserve accountsSecuritiesTransaction deposits $  million   (Click to select)Reserve accountsTransaction depositsLoansReserve deposits at FedSecurities $  million
  (Click to select)Reserve deposits at FedReserve accountsTransaction depositsLoansSecurities million
Panel B: Balance Sheet after All Changes
Federal Reserve Bank
Assets Liabilities
  (Click to select)LoansTransaction depositsSecuritiesReserve deposits at FedReserve accounts $  million   (Click to select)Reserve deposits at FedSecuritiesTransaction depositsLoansReserve accounts $  million
Bank Three
Assets Liabilities
  (Click to select)Reserve deposits at FedLoansSecuritiesReserve accountsTransaction deposits $  million   (Click to select)Transaction depositsReserve accountsReserve deposits at FedSecuritiesLoans $  million
  (Click to select)Transaction depositsSecuritiesReserve accountsReserve deposits at FedLoans million

Homework Answers

Answer #1
Federal Reserve Bank
Assets Liabilities
Securities 40 Reserve Accounts 40
(500*8%)
Bank Three
Assets Liabilities
Reserve Accounts at the Federal reserve 40 Transaction deposits $500
Loans 460
(500-40)
Panel B: Balance Sheet after All Changes
Federal Reserve Bank
Assets Liabilities
Securities 40 Reserve Accounts 40
Bank Three
Assets Liabilities
Reserve Accounts at the Federal reserve 40 Transaction deposits 800
Loans 760 (40/.05)
(800-40)
ans b
Federal Reserve Bank
Assets Liabilities
Securities 40 Reserve Accounts 40
(500*8%)
Bank Three
Assets Liabilities
Reserve Accounts at the Federal reserve 40 Transaction deposits $500
Loans 460
(500-40)
Panel B: Balance Sheet after All Changes
Federal Reserve Bank
Assets Liabilities
Securities 40 Reserve Accounts 40
Bank Three
Assets Liabilities
Reserve Accounts at the Federal reserve 40 Transaction deposits 667
Loans 627 (40/.06)
(667-40)

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