National Bank currently has $1,400 million in transaction deposits on its balance sheet. The current reserve requirement is 8 percent, but the Federal Reserve is decreasing this requirement to 6 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.

Panel A: Initial balance sheets

Federal Reserve Bank

Assets Security:

Liabilities Reserve account:

National Bank

Assets Loans:

Assets Reserve deposit:

Liabilities transaction deposit:

B. Balance sheet after all changes

Federal Reserve Bank

Assets Security:

Liabilities Reserve account:

National Bank

Assets Loans:

Assets Reserve deposit:

Liabilities transaction deposit:

B.Show the balance sheet of the Federal Reserve and National Bank if National Bank converts 90 percent of its excess reserves to loans and borrowers return 70 percent of these funds to National Bank as transaction deposits.

Federal Reserve Bank

Assets Security:

Liabilities Reserve account:

National Bank

Assets Loans:

Assets Reserve deposit:

Liabilities transaction deposit:

B. Balance sheet after all changes

Federal Reserve Bank

Assets Security:

Liabilities Reserve account:

National Bank

Assets Loans:

Assets Reserve deposit:

Liabilities transaction deposit:

2. Bank Three currently has $650 million in transaction deposits on its balance sheet. The Federal Reserve has currently set the reserve requirement at 8 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

Federal Reserve Bank

Assets Security:

Liabilities Reserve account:

National Bank

Assets Loans:

Assets Reserve deposit:

Liabilities transaction deposit:

B. Balance sheet after all changes

Federal Reserve Bank

Assets Security:

Liabilities Reserve account:

National Bank

Assets Loans:

Assets Reserve deposit:

Liabilities transaction deposit:

B. Redo part (a) using a 10 percent reserve requirement.

Assets Security:

Liabilities Reserve account:

National Bank

Assets Loans:

Assets Reserve deposit:

Liabilities transaction deposit:

B. Balance sheet after all changes

Federal Reserve Bank

Assets Security:

Liabilities Reserve account:

National Bank

Assets Loans:

Assets Reserve deposit:

Liabilities transaction deposit: