Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Bank Three currently has $700 million in transaction deposits on its balance sheet. The Federal Reserve has currently set the reserve requirement at 6 percent

Bank Three currently has $700 million in transaction deposits on its balance sheet. The Federal Reserve has currently set the reserve requirement at 6 percent of transaction deposits.

a.

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.)

Panel A: Initial Balance Sheets

Federal Reserve Bank
Assets Liabilities
(Click to select)LoansTransaction depositsReserve accountsReserve deposits at FedSecurities $ million (Click to select)SecuritiesReserve deposits at FedTransaction depositsReserve accountsLoans $ million

Bank Three
Assets Liabilities
(Click to select)SecuritiesTransaction depositsReserve deposits at FedLoansReserve accounts $ million (Click to select)Transaction depositsReserve deposits at FedSecuritiesReserve accountsLoans $ million
(Click to select)Reserve accountsTransaction depositsSecuritiesReserve deposits at FedLoans million

Panel B: Balance Sheet after All Changes

Federal Reserve Bank
Assets Liabilities
(Click to select)SecuritiesLoansReserve deposits at FedReserve accountsTransaction deposits $ million (Click to select)Transaction depositsReserve deposits at FedReserve accountsSecuritiesLoans $ million

Bank Three
Assets Liabilities
(Click to select)Transaction depositsReserve accountsLoansSecuritiesReserve deposits at Fed $ million (Click to select)LoansSecuritiesReserve accountsTransaction depositsReserve deposits at Fed $ million
(Click to select)LoansSecuritiesReserve deposits at FedReserve accountsTransaction deposits million

b.

Redo part (a) using a 8 percent reserve requirement. (Do not round intermediate calculations. Enter your answers in millions rounded to the nearest dollar amount.)

Panel A: Initial Balance Sheets

Federal Reserve Bank
Assets Liabilities
(Click to select)Reserve accountsLoansSecuritiesTransaction depositsReserve deposits at Fed $ million (Click to select)Reserve accountsTransaction depositsReserve deposits at FedSecuritiesLoans $ million

Bank Three
Assets Liabilities
(Click to select)LoansTransaction depositsReserve deposits at FedSecuritiesReserve accounts $ million (Click to select)SecuritiesTransaction depositsReserve deposits at FedReserve accountsLoans $ million
(Click to select)Reserve accountsTransaction depositsReserve deposits at FedSecuritiesLoans million

Panel B: Balance Sheet after All Changes

Federal Reserve Bank
Assets Liabilities
(Click to select)SecuritiesReserve deposits at FedLoansReserve accountsTransaction deposits $ million (Click to select)Transaction depositsReserve accountsReserve deposits at FedSecuritiesLoans $ million

Bank Three
Assets Liabilities
(Click to select)Reserve deposits at FedTransaction depositsLoansSecuritiesReserve accounts $ million (Click to select)Transaction depositsLoansSecuritiesReserve accountsReserve deposits at Fed $ million
(Click to select)SecuritiesLoansReserve accountsTransaction depositsReserve deposits at Fed million

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Principles Of Finance With Excel

Authors: Simon Benninga, Tal Mofkadi

3rd Edition

0190296380, 9780190296384

More Books

Students also viewed these Finance questions

Question

LO6 Define harassment and the role that HR plays in addressing it.

Answered: 1 week ago