National Bank currently has $1,400 million in transaction deposits on its balanc

Question

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.
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.

Required A

Required B

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. (Enter your answers in millions. Do not round intermediate calculations. Round your "Panel B" answers to 3 decimal places. (e.g., 32.161))

B

Panel A: Initial Balance Sheets Federal Reserve Bank Assets Liabilities Securities million Reserve accounts million National Bank Assets Liabilities Loans million Transaction deposits million Reserve accounts 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 accounts million

Explanation / Answer

a. Panel A:

Initial balancesheet:

FRB:

Securities: (1,400 x 0.08) = $112 million

Reserve accounts: $112 million

NB:

Loans: $1,288 million

Reserve accounts: $112 million

Transaction deposits: $1,400 million

Panel B:

Balancesheet after all changes:

FRB:

Securities: $87 million

Reserve accounts: $87 million

NB:

Loans: $1,363 million

Reserve accounts: $87 million (1,450 x 0.06)

Transaction deposits: ($1,400 + [(0.08 x 1,400 - 0.06 x 1,400) x 1/(0.06 + (1- 0.5)] = 1,450 million

b.

Panel A:

Initial balancesheet:

FRB:

Securities: (1,400 x 0.08) = $112 million

Reserve accounts: $112 million

NB:

Loans: $1,288 million

Reserve accounts: $112 million

Transaction deposits: $1,400 million

Panel B:

Balancesheet after all changes:

FRB:

Securities: $88.2 million

Reserve accounts: $88.2 million

NB:

Loans: $1,381.8 million

Reserve accounts: $88.2 million (1,470 x 0.06)

Transaction deposits: ($1,400 + [(0.08 x 1,400 - 0.06 x 1,400) x [{1/(0.06 + (1- 0.7)} x 0.90] = 1,470 million

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