Question

National Bank currently has $1,550 million in transaction deposits on its balance sheet. The current reserve requirement is 14 percent, but the Federal Reserve is decreasing this requirement to 12 percent.
a. Show the balance sheet of the Federal Reserve and National Bank if National Bank converts all excess reserves to loans, but borrowers return only 50 percent of these funds to National Bank as transaction deposits.
b. Show the balance sheet of the Federal Reserve and National Bank if National Bank converts 75 percent of its excess reserves to loans and borrowers return 50 percent of these funds to National Bank as transaction deposits.

Answer 1

Answer:

Explanation:

Purchase of securities by the federal bank

To purchase any securities the trade dealers at desk firstly call to government securities dealers of major commercial and investment banks. The govt. securities dealers provide the list of securities they want to sale.

This list also shows the maturity, denomination, and prices of securities. The FRNBY traders purchase securities at the lowest prices. They will notify the government bond agencies for the payment to selling dealers for the securities.

Panel A: Initial Balance Sheets: (IN MILLIONS)

FED

Assets- Securities: $56

Liabilities- Reserve Accounts: $56

National Bank

Assets- Loans: $644

Reserve Deposits at Fed: $56

Liabilities- Transaction deposits: $700

Panel B: After All Changes: (IN MILLIONS)

FED

Assets- Securities: $43.071

Liabilities- Reserve Accounts: $43.071

National Bank

Assets- Loans: $674.786

Reserve Deposits at Fed: $43.071

Liabilities- Transaction deposits: $717.857

New initial required reserves = 0.06 × $700 million = $42 million

Change in bank deposits = (1/(0.06 + (1 − 0.50))) × ($56 million − $42 million) = $25.000 million

Loans:

$725.000 million − $43.500 million = $681.500 million

Transaction deposits:

$700 million + ($14 × (1/(0.06 + 0.50)) = $725.000 million

Reserve deposits at Fed:

$725.000 million × 0.06 = $43.500 million

Panel A: Initial Balance Sheets: (IN MILLIONS)

FED

Assets- Securities: $56

Liabilities- Reserve Accounts: $56

National Bank

Assets- Loans: $644

Reserve Deposits at Fed: $56

Liabilities- Transaction deposits: $700

Panel B: After All Changes: (IN MILLIONS)

FED

Assets- Securities: $44.100

Liabilities- Reserve Accounts: $44.100

National Bank

Assets- Loans: $690.900

Reserve Deposits at Fed: $44.100

Liabilities- Transaction deposits: $735.000

New initial required reserves = 0.06 × $700 million = $42 million

Change in bank deposits = (1/(0.06 + (1 − 0.70))) × ($56 million − $42 million) × 0.90 = $35.000 million

Loans:

$735.000 million - $44.100 million = $690.900 million

Transaction deposits:

$700 million + ($14 × 0.90 × (1/(0.06 + 0.3))) = $735.000 million

Reserve deposits at Fed:

$735.000 million × 0.06 = $44.100 million