Question

Bank Three currently has $800 million in transaction deposits on its balance sheet. The Federal Reserve has currently set the reserve requirement at 10 percent of transaction deposits.

a. If the Federal Reserve decreases the reserve requirement to 8 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 16 percent reserve requirement.
  

If the Federal Reserve decreases the reserve requirement to 8 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. (Do not round intermediate calculations. Enter your answers in millions rounded to the nearest dollar amount.)

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	Panel A: Initial Balance Sheets Federal Reserve Bank Assets Liabilities million million Bank Three Assets Liabilities million million million Panel B: Balance Sheet after All Changes Federal Reserve Bank Assets Liabilities million million Bank Three Assets Liabilities million million million

Redo part (a) using a 16 percent reserve requirement. (Do not round intermediate calculations. Enter your answers in millions rounded to the nearest dollar amount.)

	Panel A: Initial Balance Sheets Federal Reserve Bank Assets Liabilities million million Bank Three Assets Liabilities million million million Panel B: Balance Sheet after All Changes Federal Reserve Bank Assets Liabilities million million Bank Three Assets Liabilities million million million

Answer 1

Panel A: Initial Balance Sheets: (IN MILLIONS)
FED
Assets- Securities: $80
Liabilities- Reserve Accounts: $80
Bank Three
Assets- Loans: $720 (800-80)
Reserve Deposits at Fed: $80
Liabilities- Transaction deposits: $800

Panel B: After All Changes: (IN MILLIONS)
FED
Assets- Securities: $80
Liabilities- Reserve Accounts: $80
Bank Three
Assets- Loans: $920
Reserve Deposits at Fed: $80
Liabilities- Transaction deposits: $1000
New initial required reserves = 0.08 × $800 million = $64 million
Change in bank deposits = (1/0.08) × ($80 million − $64 million) = $200 million
Loans:
$1000 − $80 = $920 million
Transaction deposits:
$80/$0.08 = $1000 million

b. Redo part (a) using a 16 percent reserve requirement

Panel A: Initial Balance Sheets: (IN MILLIONS)
FED
Assets- Securities: $128
Liabilities- Reserve Accounts: $128
Bank Three
Assets- Loans: $376 (400-24)
Reserve Deposits at Fed: $24
Liabilities- Transaction deposits: $400

Panel B: After All Changes: (IN MILLIONS)
FED
Assets- Securities: $128
Liabilities- Reserve Accounts: $128
Bank Three
Assets- Loans: $1472
Reserve Deposits at Fed: $128
Liabilities- Transaction deposits: $1600
New initial required reserves = 0.08× $800 million = $64 million
Change in bank deposits = (1/0.08) × ($128 million - $64 million) = $800 million
Loans:
$1600 million - $128million = $1472 million
Transaction deposits:
$128 million/0.08 = $1600 million

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