Question

Omega Bank has $200 million in transaction deposits on its balance sheet. The Fed's reserve requirement is currently 9 percent of transaction deposits, but they are considering reducing the reserve requirement to 8 percent. Omega withdraws all its excess reserves and that borrowers eventually return all of these funds to Omega in the form of transaction deposits.

1. Find Omega's loan entry on its balance sheet prior to the change in the reserve requirement. Enter you answer in terms of millions (EX: enter 10 for 10 million dollars).

2. Find Omega's loan entry on its balance sheet after the Fed adjusts its reserve requirement. Enter your answer in terms of millions. (EX: enter 10 for 10 million dollars).

Answer 1

Omega bank has $200 million in transactions deposits which would be shown in the liabilities side of balance sheet.

a) Following would be the entry in balance sheet of Omega bank before change in the reserve requirement

Assets	Amount(in million)	Liabilities	Amount(in mn)
Loans	$182	Transaction Deposit	$200
Reserve requirement	$18
Total	$200	Total	$200

So when reserve requirement is 9%, $18 million is reserved and rest is lended out.

b) Omega's loan entry on its balance sheet after the Fed adjusts its reserve requirement

Assets	Amount (in million)	Liabilities	Amount(in million)
Loans	$184	Transaction deposit	$200
Reserve requirement	$16
Total	$200	total	$200

So when reserve requirement is 8%, $16 million is reserved and rest is lended out.

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