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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

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