Question

"Bank Three currently has $500 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 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 8 percent reserve requirement."

Answer 1

Answer:

FED  - Balance Sheet

Assets- Securities: $30

Liabilities- Reserve Accounts: $30

Bank Three  - Balance Sheet

Assets- Loans: $470

Reserve Deposits at Fed: $30

Liabilities- Transaction deposits: $500

If reserve requirement is 4%

FED  - Balance Sheet

Assets- Securities: $20

Liabilities- Reserve Accounts: $20

Bank  - Balance Sheet

Assets- Loans: $480

Reserve Deposits at Fed: $20

Liabilities- Transaction deposits: $500

If reserve requirement is 8%

FED  - Balance Sheet

Assets- Securities: $40

Liabilities- Reserve Accounts: $40

Bank  - Balance Sheet

Assets- Loans: $460

Reserve Deposits at Fed: $40

Liabilities- Transaction deposits: $500

Explanation:

Before:

500 million x 6% = 30 million

available for loan 500 - 30 = 470 million

after, with 4%:

500 millon  x 0.04 =  20 million

500 - 20 = 480 available

after, with 8%:

500 millon  x 0.08 =  60 million

500 - 40 = 460 available