Bank Three currently has $350 million in transaction deposits on its balance she

Question

Bank Three currently has $350 million in transaction deposits on its balance sheet. The Federal Reserve has currently set the reserve requirement at 6 percent of transaction deposits.

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.)

Redo part (a) using a 10 percent reserve requirement. (Do not round intermediate calculations. Enter your answers in millions rounded to the nearest dollar amount.)

Bank Three currently has $350 million in transaction deposits on its balance sheet. The Federal Reserve has currently set the reserve requirement at 6 percent of transaction deposits.

Explanation / Answer

a.

Panel A: Initial balance sheets (in millions)

Panel B: Balance sheet after all changes

New initial required reserves = 0.04 × $350 million = $14 million
Change in bank deposits = (1/0.04) × ($21 million $14 million) = $175 million

b.

Panel A: Initial balance sheets (in millions)

Panel B: Balance sheet after all changes

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