National Bank currently has $1,500 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. 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.

Panel A: Initial Balance Sheets Federal Reserve Bank Assets Liabilities Securities $ 180 million Reserve accounts $ 180 million National Bank Assets Liabilities Loans $ 1,320 million Transaction deposits $ 1,500 million Reserve deposits at Fed 180 million Panel B: Balance Sheet after All Changes Federal Reserve Bank Assets Liabilities Securities $ 155.000 million Reserve accounts $ 155.000 million National Bank Assets Liabilities Loans Transaction deposits $ 1,550.000 million $ 1,395.000 million 155.000 million Reserve deposits at Fed Panel A: Initial Balance Sheets Federal Reserve Bank Assets Liabilities Securities $ 180 million Reserve accounts $ 180 million National Bank Assets Liabilities Loans $ 1,320 million Transaction deposits $ 1,500 million Reserve deposits at Fed 180 million Panel B: Balance Sheet after All Changes Federal Reserve Bank Assets Liabilities Securities million Reserve accounts million National Bank Assets Liabilities Loans million Transaction deposits million Reserve deposits at Fed million