MHM Bank currently has $750 million in transaction deposits on its balance sheet
ID: 2481146 • Letter: M
Question
MHM Bank currently has $750 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.
Show the balance sheet of the Federal Reserve and MHM Bank if MHM Bank converts all excess reserves to loans, but borrowers return only 50 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))
Show the balance sheet of the Federal Reserve and MHM Bank if MHM Bank converts 80 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))
MHM Bank currently has $750 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.
Explanation / Answer
a. Initial Balance Sheet: Federal Reserve Bank Assets Amount Liabilities Amount Securities ($750*8%) $ 60 Reserve Accounts $ 60 MHM Bank Assets Amount Liabilities Amount Loans $ 690 Reserve deposits at Fed $ 60 Transaction deposits $750 b.Balance sheet after increase in reserve percentage to 10% is as under: New required reserve=$750 × 10%=$75 Change in bank deposit=(1/(0.10+(1-0.5))*($75-$60)=$25 Increased transaction deposit=$750+$25=$775 Federal Reserve Bank Assets Amount Liabilities Amount Securities ($775*10%) $ 77.5 Reserve Accounts $77.5 MHM Bank Assets Amount Liabilities Amount Loans $697.5 Reserve deposits at Fed ($775*10%) $77.5 Transaction deposits ($750+$25) $ 775 b. Initial balance sheet before any changes: Federal Reserve Bank Assets Amount Liabilities Amount Securities ($750*8%) $ 60 Reserve Accounts $ 60 MHM Bank Assets Amount Liabilities Amount Loans $690 Reserve deposits at Fed $60 Transaction deposits $ 750 Panel B: Balance sheet after changes : New reserve requirement=10% of $750=$75 Change in bank deposits=(1/(0.10+(1-0.80))*($75-$60)*85%=$42.50 Federal Reserve Bank Assets Amount Liabilities Amount Securities ($771.25*10%) $ 77.125 Reserve Accounts $ 77.125 MHM Bank Assets Amount Liabilities Amount Loans $ 713.250 Reserve deposits at Fed $ 79.250 Transaction deposits $ 792.50
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