Question

National Bank currently has $450 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.
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 60 percent of these funds to National Bank as transaction deposits.
  

Answer 1

Ans (a)

The balance sheet of the Federal Reserve and National Bank when National Bank converts all excess reserve to loans and borrower return 50% of these funds to National Bank as transaction deposits:

Ans (b)

The balance sheet of the Federal Reserve and National Bank when National Bank converts 75% of the excess reserve to loans and borrower return 60% of these funds to National Bank as transaction deposits: