Question

Bank Three currently has $600 million in transaction deposits on its balance sheet. The Federal Reserve has currently set the reserve requirement at 6 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 b. Redo part (a) using a 10 percent reserve requirement. Complete this question by entering your answers in the tabs below. Required A Required 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 milion million Bank Three Assets Liabilities million mon Panel B: Balance Sheet after All Changes Federal Reserve Bank Assets Liabilities million I million Bank Three

Answer 1

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.

Answers:

Panel A: Initial Balance Sheets:

Federal Reserve Bank
Assets	Amount(in millions)	Liabilities	Amount (in millions)
Securities	36	Reserve accounts	36

Bank Three
Assets	Amount(in millions)	Liabilities	Amount(in millions)
Loans	564	Transaction deposits	600
Reserve deposits at Fed	36

Now, we need to calculate the change in bank deposits

New initial required reserves = 0.05 × $600 million = $30 million

Change in bank deposits = (1/0.05) × ($36 million − $30 million) = $120 million

Loans: $720 − $36 = $684 million

Transaction deposits:$36/$0.05 = $720 million

Panel B: Balance Sheet after All Changes Resulting from Decrease in Reserve Requirement

Federal Reserve Bank
Assets	Amount(in millions)	Liabilities	Amount(in millions)
Securities	36	Reserve accounts	36

Assets	Amount(in millions)	Liabilities	Amount(in millions)
Loans	684	Transaction deposits	720
Reserve deposits at Fed	36

(b). Redo part (a) using a 10 percent reserve requirement.

Panel A: Initial Balance Sheets:

Federal Reserve Bank
Assets	Amount(in millions)	Liabilities	Amount (in millions)
Securities	36	Reserve accounts	36

Bank Three
Assets	Amount(in millions)	Liabilities	Amount(in millions)
Loans	564	Transaction deposits	600
Reserve deposits at Fed	36

Now, we need to calculate the change in bank deposits

New initial required reserves = 0.10 × $600 million = $60 million

Change in bank deposits = (1/0.10) × ($36 million − $60 million) = -$240 million

Loans: $360 − $36 = $324 million

Transaction deposits:$36/$0.10 = $360 million

Panel B: Balance Sheet after All Changes Resulting from Increase in Reserve Requirement

Federal Reserve Bank
Assets	Amount(in millions)	Liabilities	Amount(in millions)
Securities	36	Reserve accounts	36

Bank Three
Assets	Amount (in millions)	Liabilities	Amount (in millions)
Loans	324	Transaction deposits	360
Reserve deposits at Fed	36