Question

BSW Bank currently has $650 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 BSW and the Federal Reserve System just before and after the full effect of the reserve requirement change. Assume BSW withdraws all excess reserves and gives out loans, and that borrowers eventually return all of these funds to BSW in the form of transaction deposits. (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
(Click to select)Transaction depositsSecuritiesReserve deposits at FedReserve accountsLoans	$ million	(Click to select)LoansReserve deposits at FedTransaction depositsReserve accountsSecurities	$ million

BSW Bank
Assets		Liabilities
(Click to select)SecuritiesReserve accountsTransaction depositsLoansReserve deposits at Fed	$ million	(Click to select)Transaction depositsLoansReserve accountsSecuritiesReserve deposits at Fed	$ million
(Click to select)SecuritiesLoansReserve accountsReserve deposits at FedTransaction deposits	million

Panel B: Balance sheet after all changes

Federal Reserve Bank
Assets		Liabilities
(Click to select)LoansReserve accountsSecuritiesTransaction depositsReserve deposits at Fed	$ million	(Click to select)Transaction depositsLoansReserve accountsSecuritiesReserve deposits at Fed	$ million

BSW Bank
Assets		Liabilities
(Click to select)SecuritiesReserve deposits at FedTransaction depositsLoansReserve accounts	$ million	(Click to select)LoansTransaction depositsReserve deposits at FedSecuritiesReserve accounts	$ million
(Click to select)LoansReserve accountsSecuritiesTransaction depositsReserve deposits at Fed	million

b.	Redo part (a) using a 10 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
(Click to select)Transaction depositsLoansReserve accountsSecuritiesReserve deposits at Fed	$ million	(Click to select)Reserve deposits at FedReserve accountsLoansSecuritiesTransaction deposits	$ million

BSW Bank
Assets		Liabilities
(Click to select)Reserve deposits at FedSecuritiesTransaction depositsReserve accountsLoans	$ million	(Click to select)LoansSecuritiesTransaction depositsReserve deposits at FedReserve accounts	$ million
(Click to select)Transaction depositsSecuritiesReserve deposits at FedLoansReserve accounts	million

Panel B: Balance sheet after all changes

Federal Reserve Bank
Assets		Liabilities
(Click to select)Reserve accountsTransaction depositsLoansReserve deposits at FedSecurities	$ million	(Click to select)Transaction depositsSecuritiesReserve accountsLoansReserve deposits at Fed	$ million

BSW Bank
Assets		Liabilities
(Click to select)Reserve deposits at FedReserve accountsTransaction depositsLoansSecurities	$ million	(Click to select)LoansReserve deposits at FedTransaction depositsSecuritiesReserve accounts	$ million
(Click to select)Transaction depositsLoansSecuritiesReserve deposits at FedReserve accounts	million

Answer 1