Question

MHM Bank currently has $900 million in transaction deposits on its balance sheet. The current reserve requirement is 8 percent, but the Federal Reserve is increasing this requirement to 10 percent. a. Show the balance sheet of the Federal Reserve and MHM Bank if MHM Bank converts all excess reserves to loans, but borrowers return only 70 percent of these funds to MHM Bank as transaction deposits. b. Show the balance sheet of the Federal Reserve and MHM Bank if MHM Bank converts 80 percent of its excess reserves to loans and borrowers return 85 percent of these funds to MHM Bank as transaction deposits. Complete this question by entering your answers in the tabs below. Required A Required B Show the balance sheet of the Federal Reserve and MHM Bank MHM Bank converts all excess reserves to loans, but borrowers return only 70 percent of these funds to MHM Bank as transaction deposits. (Enter your answers in millions. Do not round Intermediate calculations. Round your "Panel B' answers to 3 decimal places. (e.9., 32.161)) Panel A: Initial Balance Sheets Federal Reserve B Assets Liabilities mor Assets Liabilities Imillion milion Panel B: Balance Sheet after All Changes Federal Reserve Bank Assets Liabilities million nison

Answer 1

Part A

Panel A: Initial Balance sheets
Federal Reserve Bank
Assets		Liabilities
Treasury Securities (900*6%)	72	Reserve accounts	72
MHM Bank
Assets		Liabilities
Reserve accounts at the Federal Reserve	72	Transaction deposits	900
Loans (900-72)	828
Panel B: Balance Sheet after all changes
Federal Reserve Bank
Assets		Liabilities
Treasury Securities	85.50	Reserve accounts	85.50
MHM Bank
Assets		Liabilities
Reserve accounts at the Federal Reserve	85.50	Transaction deposits	855
Loans	769.50

New initial required reserves = 0.10 × $900 million = $90 million
Change in bank deposits = (1/(0.10 + (1 − 0.70))) × ($72 million - $90 million) = −$45.000 million

Transaction deposits = 900-455 = $855 million

Reserve deposits at Fed = 855*10% = 85.50

Loans = 855-85.50 = 769.50

Part B

Panel A: Initial Balance sheets
Federal Reserve Bank
Assets		Liabilities
Treasury Securities (900*6%)	72	Reserve accounts	72
MHM Bank
Assets		Liabilities
Reserve accounts at the Federal Reserve	72	Transaction deposits	900
Loans (900-72)	828
Panel B: Balance Sheet after all changes
Federal Reserve Bank
Assets		Liabilities
Treasury Securities	84.24	Reserve accounts	84.24
MHM Bank
Assets		Liabilities
Reserve accounts at the Federal Reserve	84.24	Transaction deposits	842.40
Loans	758.16

New initial required reserves = 0.10 × $900 million = $90 million
Change in bank deposits = (1/(0.10 + (1 − 0.85))) × ($72 million - $90 million)* 80% = −$57.60 million

Transaction deposits = 900-57.60 = $842.40 million

Reserve deposits at Fed = 842.40 *10% = 84.24

Loans = 842.40-84.24 = 758.16