Given panel A, complete Panel B. MHM Bank currently has $500 million in transact

Question

Given panel A, complete Panel B.

MHM Bank currently has $500 million in transaction deposits on its balance sheet. The current reserve requirement is 8 percent, but the Federal Reserve is increasing this requirement to 10 percent.

a. Show the balance sheet of the Federal Reserve and MHM Bank if MHM Bank converts all excess reserves to loans, but borrowers return only 70 percent of these funds to MHM Bank as transaction deposits. (Enter your answers in millions. Do not round intermediate calculations. Round your "Panel B" answers to 3 decimal places. (e.g., 32.161)) Panel A: Initial balance she ets Federal Reserve Bank Assets Liabilities Securities 40 million Reserve accounts 40 million MHM Bank Assets Liabilities Loans 460 million Transaction deposits 500 milon Reserve deposits at Fed 40 million Panel B: Balance sheet after all changes Federal Reserve Bank Assets Liabilities Securities millionRre accounts million MHM Bank Assets Liabilities Loans million Transaction deposits million Reserve deposits at Fed milliorn

Explanation / Answer

The balance sheet after increase in the reserve requirement to 10% would be as follows:

After an increase in reserve requirement, the amount extended as loan would reduce from $460 to $450. It is so because the, MHM bank would be left with lesser available money at a higher reserve requirement. The balance with Fed will increase from $40 to $50.

Federal Reserve Bank Assets Liabilities Securities (500*10%) $50 million Reserve Accounts $50 million MHM Bank Assets Liabilities Loans (500 – 10%*500) $450 million Transaction Deposits $500 million Reserve Deposits at Fed $50 million

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