National Bank currently has $1,650 million in transaction deposits on its balanc

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National Bank currently has $1,650 million in transaction deposits on its balance sheet. The current reserve requirement is 12 percent, but the Federal Reserve is decreasing this requirement to 10 percent.

Show the balance sheet of the Federal Reserve and National Bank if National Bank converts all excess reserves to loans, but borrowers return only 50 percent of these funds to National 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))

Show the balance sheet of the Federal Reserve and National Bank if National Bank converts 70 percent of its excess reserves to loans and borrowers return 55 percent of these funds to National 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))

National Bank currently has $1,650 million in transaction deposits on its balance sheet. The current reserve requirement is 12 percent, but the Federal Reserve is decreasing this requirement to 10 percent.

a.

Show the balance sheet of the Federal Reserve and National Bank if National Bank converts all excess reserves to loans, but borrowers return only 50 percent of these funds to National 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 sheets Federal Reserve Bank Assets Liabilities    $ million    $ million National Bank Assets Liabilities    $ million    $ million    $ million Panel B: Balance sheet after all changes Federal Reserve Bank Assets Liabilities    $ million    $ million National Bank Assets Liabilities    $ million    $ million    $ million b.

Show the balance sheet of the Federal Reserve and National Bank if National Bank converts 70 percent of its excess reserves to loans and borrowers return 55 percent of these funds to National 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 sheets Federal Reserve Bank Assets Liabilities    $ million    $ million National Bank Assets Liabilities    $ million    $ million    $ million Panel B: Balance sheet after all changes Federal Reserve Bank Assets Liabilities    $ million    $ million National Bank Assets Liabilities    $ million    $ million    $ million

Explanation / Answer

Answer:a Panel A: Initial Balance Sheets: (IN MILLIONS)

Panel B: After All Changes: (IN MILLIONS)

New initial required reserves = 0.10 × $1650 million = $165 million
Change in bank deposits = (1/(0.10 + (1 0.50))) × ($198 million $165 million) = $55.000 million
Loans:
$1705.000 million $170.500 million = $1534.500 million
Transaction deposits:
$1650 million + ($33 × (1/(0.10 + 0.50)) = $1705.000 million
Reserve deposits at Fed:
$1705.000 million × 0.10 = $170.5 million

Answer:b

Panel B: After All Changes: (IN MILLIONS)

New initial required reserves = 0.10 × $1650 million = $165 million
Change in bank deposits = (1/(0.10 + (1 0.55))) × ($198 million $165 million)*0.70 = $42.000 million
Loans:
$1692.000 million $169.200 million = $1522.800 million
Transaction deposits:
$1650 million + ($33 × (1/(0.10 + 0.45)) = $1692.000 million
Reserve deposits at Fed:
$1692.000 million × 0.10 = $169.2million

Federal Reserve Bank Assets Amount ($) in millions Liabilities Amount ($) in millions Securities 198 Reserve Accounts 198 National Bank Assets Amount ($) in millions Liabilities Amount ($) in millions Loans 1452 Transaction Deposit 1650 Reserve Deposits at Fed 198 Total Assets 1650 Total liabilities 1650

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