MHM Bank currently has $650 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 sheets

Federal Reserve Bank
Assets		Liabilities
(Click to select)Reserve accountsTransaction depositsLoansSecuritiesReserve deposits at Fed	$ million	(Click to select)Reserve accountsReserve deposits at FedSecuritiesTransaction depositsLoans	$ million

MHM Bank
Assets		Liabilities
(Click to select)Reserve deposits at FedLoansReserve accountsTransaction depositsSecurities	$ million	(Click to select)Reserve accountsReserve deposits at FedLoansTransaction depositsSecurities	$ million
(Click to select)Transaction depositsReserve accountsReserve deposits at FedSecuritiesLoans	$ million

Panel B: Balance sheet after all changes

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

MHM Bank
Assets		Liabilities
(Click to select)LoansTransaction depositsReserve accountsReserve deposits at FedSecurities	$ million	(Click to select)Reserve deposits at FedTransaction depositsLoansReserve accountsSecurities	$ million
(Click to select)LoansReserve accountsSecuritiesTransaction depositsReserve deposits at Fed	$ million

b.

Show the balance sheet of the Federal Reserve and MHM Bank if MHM Bank converts 70 percent of its excess reserves to loans and borrowers return 85 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 sheets

Federal Reserve Bank
Assets		Liabilities
(Click to select)Reserve accountsReserve deposits at FedSecuritiesTransaction depositsLoans	$ million	(Click to select)SecuritiesTransaction depositsReserve accountsLoansReserve deposits at Fed	$ million

MHM Bank
Assets		Liabilities
(Click to select)Reserve deposits at FedSecuritiesTransaction depositsLoansReserve accounts	$ million	(Click to select)SecuritiesLoansTransaction depositsReserve deposits at FedReserve accounts	$ million
(Click to select)Reserve deposits at FedTransaction depositsSecuritiesReserve accountsLoans	$ million

Panel B: Balance sheet after all changes

Federal Reserve Bank
Assets		Liabilities
(Click to select)SecuritiesTransaction depositsLoansReserve accountsReserve deposits at Fed	$ million	(Click to select)Reserve deposits at FedTransaction depositsLoansReserve accountsSecurities	$ million

MHM Bank
Assets		Liabilities
(Click to select)SecuritiesLoansTransaction depositsReserve deposits at FedReserve accounts	$ million	(Click to select)Reserve deposits at FedTransaction depositsLoansReserve accountsSecurities	$ million
(Click to select)Reserve deposits at FedReserve accountsSecuritiesLoansTransaction deposits	$ million

References

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