question archive Bank Three currently has $600 million in transaction deposits on its balance sheet
Bank Three currently has $600 million in transaction deposits on its balance sheet
Subject:EconomicsPrice:2.88 Bought3
Bank Three currently has $600 million in transaction deposits on its balance sheet. The Federal Reserve has currently set the reserve requirement at 10% of transaction deposits.
a. Suppose the Federal Reserve decreases the reserve requirement to 8%. 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 that Bank Three withdraws all excess reserves and gives out loans and that borrower eventually return all of these funds to Bank Three in the form of transaction deposits.
b. Redo part (a) using a 12% reserve requirement.
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a) Initial Balance Sheets
| Federal Reserve | |||
| Assets | Liabilities | ||
| Securities | $60 million | Reserve Accounts | $60 million |
| Federal Reserve | |||
| Assets | Liabilities | ||
| Reserve Deposits at Fed | $60 million | Transaction Deposits | $600 million |
| Loans | $540 million |
If the reserve requirement decreases to 8%
| Federal Reserve | |||
| Assets | Liabilities | ||
| Reserve Deposits at Fed | $60 million | Reserve Accounts ($60 million / 8%) | $750 million |
| Loans | $690 million |
b) Using the 12% reserve requirement
| Federal Reserve | |||
| Assets | Liabilities | ||
| Reserve Deposits at Fed | $60 million | Reserve Accounts ($60 million / 12%) | $500 million |
| Loans | $540 million |
