Question

You have been asked to assess the impact of possible changes in reserve requirement components on the dollar amount of reserves required. Assume the reserve percentages are currently set at 2 percent on the first $50 million of traction account amounts; 4 percent on the second $50 million; and 10 percent on transaction amounts over $100 million. The First National Bank has transaction account balances of $100 million, while the Second National Bank’s transaction balances are $150 million and the Third National Bank’s transaction balances are $250 million.

a. Determine the dollar amounts of required reserves for each of the three banks.

b. Calculate the percentage of reserves to total transactions accounts for each of the three banks.

c. The Central Bank wants to slow the economy by raising the reserve requirements for member banks. To do so, the reserve percentages will be increased to 12 percent on transaction balances above $100 million. Simultaneously, the 2 percent rate will apply on the first $25 million. Calculate the reserve requirement amount for each of the three banks after these changes have taken place.

d. Show the dollar amount of changes in reserve requirement amounts for each bank. Calculate the percentage of reserve requirement amounts to transaction account balances for each bank.

e. Which of the two reserve requirement changes discussed in (c) causes the greatest impact on the dollar amount of reserves for all three of the banks?

f. Now assume that you could either: (1) lower the transactions account amount for the lowest category from $50 million down to $25 million, or (2) increase the reserve percentage from 10 percent to 12 percent on transactions account amounts over $200 million. Which choice would you recommend if you were trying to achieve a moderate slowing of economic activity?

Answer 1

Ansa) dollar amounts of required reserves for each of the three banks.

Particulars	Bank 1 Amt in Millions	Bank 2	Bank 3
For first 50 M	50*2/100=1	50*2/100=1	50*2/100=1
For next 50M	50*4/100=2	50*4/100=2	50*4/100=2
For above 100 M		50*10/100=5	150*10/100=15
Total	3	8	18

Ans B) percentage of reserves to total transactions accounts for each of the three banks.

Bank 1:- 3/100*100= 3%

Bank 2:- 8/150*100= 5.33%

Bank 3:- 18/250*100= 7.2%

Ans C) Calculation of reserve requirement amount for each of the three banks after these changes have taken place.

In the absence of information it is assumed that Reserve percentage of more than 25 till 100 million is 4% .

Particulars	Bank 1 Amt in Millions	Bank 2	Bank 3
For first 25M	25*2/100=0.5	25*2/100=0.5	25*2/100=0.5
For next 75M	75*4/100=3	75*4/100=3	75*4/100=3
For above 100 M		50*12/100=6	150*12/100=18
Total	3.5	9.5	21.5

Ans D)  changes in reserve requirement amounts for each bank

Bank 1:- 3.5 - 3 = 0.5 M

Bank 2:- 9.5 - 8=1.5 M

Bank 3:- 21.5 -18=3.5 M

percentage of reserve requirement amounts to transaction account balances for each bank.

Bank 1:- 3.5/100*100= 3.5%

Bank 2:- 9.5/150*100= 6.33%

Bank 3:- 21.5/250*100= 8.6%

Ans E) Change of 2% of reserve on first 25 M transaction will affect all the three bank because change of reserve rate from 10% to 12% does not affects bank 1 because it does not exceeds transaction limit of 100 M.

Ans F) I will reccomned of option 1 i. e lower the transactions account amount for the lowest category from $50 million down to $25 million, because it will affects all the three banks and increase the reserve however increase in rate to 12 % on 200 m will only affect bank 3 .