Question

BSW Bank currently has $300 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 4 percent, show the balance sheet of BSW and the Federal Reserve System just before and after the full effect of the reserve requirement change. Assume BSW withdraws all excess reserves and gives out loans and that borrowers eventually return all of these funds to BSW in the form of transaction deposits. b. Redo part (a) using a 8 percent reserve requirement. Complete this question by entering your answers in the tabs below. Required A Required B If the Federal Reserve decreases the reserve requirement to 4 percent, show the balance sheet of BSW and the Federal Reserve System just before and after the full effect of the reserve requirement change. Assume BSW withdraws all excess reserves and gives out loans and that borrowers eventually return all of these funds to BSW in the form of transaction deposits. (Do not round Intermediate calculations. Enter your answers in millions rounded to the nearest dollar amount.) Show less Panel A: Initial Balance Sheets Federal Reserve Bank Assets Liabilities 1 million BSW Bank Liabilities Panel B: Balance Sheet after All Changes Federal Reserve Bank Liabilities

Answer 1

a.If the Federal Reserve decreases the reserve requirement to 4 percent, show the balance sheet of BSW Bank and the Federal Reserve System just before and after the full effect of the reserve requirement change. Assume BSW Bank withdraws all excess reserves and gives out loans, and that borrowers eventually return all of these funds to BSW Bank in the form of transaction deposits.

Answers:

Panel A: Initial Balance Sheets:

Federal Reserve Bank
Assets	Amount (in millions)	Liabilities	Amount (in millions)
Treasury Securities	18	Reserve accounts	18

BSW Bank
Assets	Amount (in millions)	Liabilities	Amount (in millions)
Loans	282	Transaction deposits	300
Reserve deposit at Fed	18

Next step is to calculate the change in bank deposits

New initial required reserves = 0.04 × $300 million = $12million

Change in bank deposits = (1/0.04) × ($18 million − $12 million) = $150 million

Loans: $450− $18 = $432million

Transaction deposits:$18/$0.04 = $450million

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	18	Reserve accounts	18

BSW Bank
Assets	Amount (in millions)	Liabilities	Amount (in millions)
Loans	432	Transaction deposits	450
Reserve deposits at Fed	18

(b). Redo part (a) using a 8 percent reserve requirement.

Panel A: Initial Balance Sheets:

Federal Reserve Bank
Assets	Amount (in millions)	Liabilities	Amount (in millions)
Treasury Securities	18	Reserve accounts	18

BSW Bank
Assets	Amount (in millions)	Liabilities	Amount (in millions)
Loans	282	Transaction deposits	300
Reserve deposit at Fed	18

Next step is to calculate the change in bank deposits

New initial required reserves = 0.08 × $300 million = $24million

Change in bank deposits = (1/0.08) × ($18 million − $24 million) = -$75 million

Loans: $225 − $18= $207 million

Transaction deposits:$18/$0.08 = $225 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)
Treasury Securities	18	Reserve accounts	18

BSW Bank
Assets	Amount (in millions)	Liabilities	Amount (in millions)
Loans	207	Transaction deposits	225
Reserve deposits at Fed	18