Question

Bank Three currently has $650 million in transaction deposits on its balance sheet. The Federal Reserve has currently set the reserve requirement at 8 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 10 percent reserve requirement.

(Use Excel Spreadsheet for answers)

Answer 1

	Initial Balance Sheet
			Federal Reserve's Balance Sheet
	Assets			Liabilities
	Treasury Securities		52	Reserve Accounts		52
			BSW Bank's Balance Sheet
	Reserve accounts at the federal reserve		52	Transaction Deposits		$600
	Loans		548
a			Federal Reserve's Balance Sheet
	Assets			Liabilities
	Treasury Securities		52	Reserve Accounts		52
			BSW Bank's Balance Sheet
	Reserve accounts at the federal reserve		52	Transaction Deposits		$1,300
	Loans		1248	(52/0.04)
b	Initial Balance Sheet
			Federal Reserve's Balance Sheet
	Assets			Liabilities
	Treasury Securities		52	Reserve Accounts		52
			BSW Bank's Balance Sheet
	Reserve accounts at the federal reserve		52	Transaction Deposits		$600
	Loans		548
			Federal Reserve's Balance Sheet
	Assets			Liabilities
	Treasury Securities		52	Reserve Accounts		52
			BSW Bank's Balance Sheet
	Reserve accounts at the federal reserve		52	Transaction Deposits		$520
	Loans		468	(52/0.10)