Question 4 a) BSW Bank currently has $180 million in transaction deposits on its balance sheet. The Federal Reserve has currently set the reserve requirement at 12% of transaction deposits. If the Federal Reserve decreases the reserve requirement to 10%, show the balance sheet of BSW and the Federal Reserve System just before and after the full effect of the reserve requirement change. Assume BSW withdraws all excess reserves and gives out loans and that borrowers eventually return all of these funds to BSW in the form of transaction deposits. [12 marks] b) The FOMC has instructed the FRBNY Trading Desk to purchase $660 million in U.S. Treasury securities. The Federal Reserve has currently set the reserve requirement at 11% of transaction deposits. Assume U.S. banks withdraw all excess reserves and give out loans. i) Assume also that borrowers eventually return all of these funds to their banks in the form of transaction deposits. Calculate the full effect of this purchase on bank deposits and the money supply. Please show each step of your calculation. [3 marks] ii) Calculate the full effect of this purchase on bank deposits and the money supply if borrowers return only 96% of these funds to their banks in the form of transaction deposits. Please show each step of your calculation. [3 marks] c) The Federal Reserve has varied between its use of the money supply and interest rates as the target variable used to control economic activity in the United States. Suppose currently the Central Bank is targeting interest rates. Utilising the Money Demand and Money Supply Framework, please draw a graph to explain and evaluate the policy initiative employed by the Central Bank given a shift (increase and decrease respectively) of the Money Demand Curve. [12 marks] [Total marks: 30 marks]