Question

BSW Bank currently has $700 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 5 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.)

Answer 1

Solution - Balance Sheet Presentation

Part 1 - Federal Reserve Requirement is 8%

Total Reserve Requirement = ($700 Million * 8%) = $56 Million

Balance Sheet of Federal Reserve System

Assets	Amount (in Million)	Liabilities	Amount (in Million)
Securities	$56	Reserve Accounts	$56
Total	$56	Total	$56

Balance sheet of BSW Bank

Assets	Amount (in Million)	Liabilities	Amount (in Million)
Loans ($700 - $56)	$644	Transaction Deposits	$700
Reserve Deposits at FED	$56
Total	$700	Total	$700

Part 2 - Balance sheet if Federal Reserve Requirement is 5%

New Federal Reserve Requirement = ($700 Million * 5%) = $35 Million

Change in Bank Deposits = ($56 Million - $35 Million)/5% = $420 Million

New Transaction Deposits = ($56 Million/5%) = $1120 Million

New Loans = ($1120 Million - $56 Million) = $1064 Million

Balance Sheet of Federal Reserve System

Assets	Amount (in Million)	Liabilities	Amount (in Million)
Securities	$56	Reserve Accounts	$56
Total	$56	Total	$56

Balance Sheet BSW Bank

Assets	Amount (in Million)	Liabilities	Amount (in Million)
Loans ($1120 - $56)	$1064	Transaction Deposits	$1120
Reserve Deposits at FED	$56
Total	$1120	Total	$1120