Question

National Bank currently has $1,800 million in transaction deposits on its balance sheet. The current reserve requirement is 12 percent, but the Federal Reserve is decreasing this requirement to 10 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.

panel A initial balance sheets: federal reserve bank:

Assets:______ Millions Liabilities _____________ millions

bank three:

Assets:______ Millions Liabilities _____________ millions

Assets:______ Millions

panel B: balance sheet after all changes: federal reserve bank:

Assets:______ Millions Liabilities _____________ millions

bank three

Assets:______ Millions Liabilities _____________ millions

Assets:______ Millions

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 65 percent of these funds to National Bank as transaction deposits.

panel A initial balance sheets: federal reserve bank:

Assets:______ Millions Liabilities _____________ millions

bank three:

Assets:______ Millions Liabilities _____________ millions

Assets:______ Millions

panel B: balance sheet after all changes: federal reserve bank:

Assets:______ Millions Liabilities _____________ millions

bank three

Assets:______ Millions Liabilities _____________ millions

Assets:______ Millions

Answer 1

a.Panel A: Initial Balance Sheets: (IN MILLIONS)

Federal Reserve Bank
Assets	Amount($) Million	Liabilities	Amount($)Million
Securities($1800*12%)	216	Reserve Account	216

National Bank
Assets	Amount($) Million	Liabilities	Amount($)Million
Loan	1584	Transaction Deposite	1800
Reserve deposite at federal Reserve Bank	216

panel B: balance sheet after all changes(IN MILLIONS)

New initial required reserves = 0.10 × $1800 million = $180 million

Excess reserve = $216 million-$180 million = $36 million
Change in bank deposits = (1/(0.10 + (1 − 0.50))) × ($216million − $180 million) = $60.000 million

Loans:
$1860 million − $186 million = $1674 million

Transaction deposits:
$1800 million + ($36 × (1/(0.10 + 0.50)) = $1860 million

Reserve deposits at Fed:
$1860 million × 0.10 = $186 million

Federal Reserve Bank
Assets	Amount($) Million	Liabilities	Amount($)Million
Securities	186	Reserve Account	186

National Bank
Assets	Amount($) Million	Liabilities	Amount($)Million
Loan	1674	Transaction Deposite	1860
Reserve deposite at federal Reserve Bank	186

---------------------------------

b.

Panel A: Initial Balance Sheets: (IN MILLIONS)

Federal Reserve Bank
Assets	Amount($) Million	Liabilities	Amount($)Million
Securities($1800*12%)	216	Reserve Account	216

National Bank
Assets	Amount($) Million	Liabilities	Amount($)Million
Loan	1584	Transaction Deposite	1800
Reserve deposite at federal Reserve Bank	216

panel B: balance sheet after all changes(IN MILLIONS)

New initial required reserves = 0.10 × $1800 million = $180 million

Excess reserve = $216 million-$180 million = $36 million
Change in bank deposits = (1/(0.10 + (1 − 0.65))) × ($216million − $180 million) x 0.75 = $60.000 million

Loans:
$1860 million − $186 million = $1674 million

Transaction deposits:
$1800 million + ($36 × (1/(0.10 + 0.35)) x 0.75)= $1860 million

Reserve deposits at Fed:
$1860 million × 0.10 = $186 million

Federal Reserve Bank
Assets	Amount($) Million	Liabilities	Amount($)Million
Securities	186	Reserve Account	186

National Bank
Assets	Amount($) Million	Liabilities	Amount($)Million
Loan	1674	Transaction Deposite	1860
Reserve deposite at federal Reserve Bank	186