Practice with the balance of payments: Current account + Capital account = Chang

Question

Practice with the balance of payments:

    Current account + Capital account = Change in official reserves

      a. Current account = %u2212$10, Capital account = +$15. What is the change in reserves?

      b. Current account = %u2212$10, Change in reserves = %u2212$3. What is the capital account?

      c. Your college expenses = $12,000, Income from your barista job = $4,000. What is your current account? If you haven%u2019t changed your reserves (i.e., cash savings) at all, what is the capital account (i.e., borrowing from parents or bank)?

Explanation / Answer

Reserve requirements are one of the three monetary policy tools the Federal Reserve uses to implement monetary policy. However, in recent years the Fed has seldom employed changes in reserve requirements to enact monetary policy, because open market operations are a much more precise tool.1 What Are Reserve Requirements? Banks and other depository institutions (savings institutions, credit unions, and foreign banking entities) are required to hold a portion of their deposits as reserves. Depository institutions may hold reserves either as vault cash or as deposits with Federal Reserve Banks.2 Effective December 28, 2000, depository institutions were required to hold a reserve requirement of 3 percent against their first $42.8 million in net transaction accounts (demand and other checkable deposits) and 10 percent against their net transaction accounts above $42.8 million.3 At present, there is no reserve requirement on time and savings deposits. The table shows that aggregate required reserves of depository institutions were $36.9 billion as of June 2001, according to the Federal Reserve Board

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