MHM Bank currently has $300 million in transaction deposits on its balance sheet
ID: 2728112 • Letter: M
Question
MHM Bank currently has $300 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 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))
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))
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))
Explanation / Answer
a Panel A: Initial balance sheets Federal Reserve Bank Assets $ million Liabilities $ million Securities 24.00 Reserve accounts 24.00 MHM Bank Assets $ million Liabilities $ million Loans 276.00 Reserve deposits at Fed 24.00 Transaction deposits 300.00 Panel B: Balance sheet after all changes Federal Reserve Bank Assets $ million Liabilities $ million Securities 28.50 Reserve accounts 28.50 MHM Bank Assets $ million Liabilities $ million Loans 256.50 Reserve deposits at Fed 28.50 Transaction deposits 285.00 Working Notes (1) New Initial requirement = 10% of $300 m= $30m (2) Change in Bank deposits = $24m -$30m x [1/ 0.10+0.30) = (-)$15m (3) Loans = $285m - 10% = $256.50m (4) Transaction Deposits = (-$6.00m x2.5 ) + $300m = $285.00m (5) Reserve Deposits at Fed= $285 m x 10% = $28.50 m b Panel A: Initial balance sheets Federal Reserve Bank Assets $ million Liabilities $ million Securities 24.000 Reserve accounts 24.000 MHM Bank Assets $ million Liabilities $ million Loans 276.000 Reserve deposits at Fed 24.000 Transaction deposits 300.000 Panel B: Balance sheet after all changes Federal Reserve Bank Assets $ million Liabilities $ million Securities 27.425 Reserve accounts 27.425 MHM Bank Assets $ million Liabilities $ million Loans 247.050 Reserve deposits at Fed 27.450 Transaction deposits 274.500 Working Notes : (1) New Initial requirement = 10% of $300 m= $30m (2) Change in Bank deposits = ($24m -$30m) 0.85 x [1/ 0.10+0.10) = (-)$25.5m (3) Loans = ($300m -$25.5m)- 10% = $247.05m (4) Transaction Deposits = (-$6.00m x 0.85) (1/0.20) + $300m = $274.500m (5) Reserve Deposits at Fed = 10% of $274.50m
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