Score: 1.69/10 Points 16.

90 %
1. Award: 1.69 out of 2.50 points

Bank Three currently has $500 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 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 8 percent reserve requirement.

Complete this question by entering your answers in the tabs below.

Required A Required B

If the Federal Reserve decreases the reserve requirement to 4 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.)
Show less

Panel A: Initial Balance Sheets

Federal Reserve Bank
Assets Liabilities
Securities  $ 30  million Reserve accounts  $ 30  million

Bank Three
Assets Liabilities
Reserve deposits at Fed  $ 30  million Transaction deposits  $ 500  million
Loans  470  million

Panel B: Balance Sheet after All Changes

Federal Reserve Bank
Assets Liabilities
Securities  $ 45  million Reserve accounts  $ 45  million

Bank Three
Assets Liabilities
Reserve deposits at Fed  $ 30  million Transaction deposits  $ 780  million
Loans  750  million

 Required A Required B 

References

Worksheet Difficulty: 2 Medium

Bank Three currently has $500 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 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 8 percent reserve requirement.
 Complete this question by entering your answers in the tabs below.

Required A Required B

If the Federal Reserve decreases the reserve requirement to 4 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.)
Show less

Panel A: Initial Balance Sheets

Federal Reserve Bank
Assets Liabilities
Securities $ 30 million Reserve accounts $ 30 million

Bank Three
Assets Liabilities
Loans $ 470 million Transaction deposits $ 500 million
Reserve deposits at Fed 30 million

Panel B: Balance Sheet after All Changes

Federal Reserve Bank
Assets Liabilities
Securities $ 30 million Reserve accounts $ 30 million

Bank Three
Assets Liabilities
Loans $ 720 million Transaction deposits $ 750 million
Reserve deposits at Fed 30 million

 Required A Required B 

Explanation:

a.
Panel B: Balance Sheet after All Changes Resulting from Decrease in Reserve Requirement
New initial required reserves = 0.04 × $500 million = $20 million
Change in bank deposits = (1/0.04) × ($30 million − $20 million) = $250 million

Loans:
$750 million − $30 million = $720 million

Transaction deposits:
$30 million/0.04 = $750 million

b.
Panel B: Balance Sheet after All Changes Resulting from Increase in Reserve Requirement
New initial required reserves = 0.08 × $500 million = $40 million
Change in bank deposits = (1/0.08) × ($30 million − $40 million) = −$125 million

Loans:
$375 million − $30 million = $345 million

Transaction deposits:
$30 million/0.08 = $375 million