Question

Bank Three currently has $500 million in transaction deposits on its balance sheet. The Federal Reserve has currently set the reserve requirement at 8 percent of transaction deposits. Complete the bank's initial balance sheet under the current reserve requirement.Following the previous question, if the Federal Reserve decreases the reserve requirement to 5 percent, show the balance sheet of Bank Three after the full effect of the reserve requirement change. Assume Bank Three withdraws all excess reserves and gives out loans and that borrowers eventually return all of these funds to Bank Three in the form of transaction deposits. Also assume that Bank Three is the only commercial bank in the economy.

Answer 1

To calculate the initial balance sheet of Bank Three under the current reserve requirement of 8%, we need to determine the required reserves. After the Federal Reserve decreases the reserve requirement to 5%, the new balance sheet of Bank Three would have the updated required reserves.

Step-by-step explanation:

To calculate the initial balance sheet of Bank Three under the current reserve requirement of 8%, we need to determine the required reserves. The required reserves can be calculated by multiplying the transaction deposits by the reserve requirement percentage:

Required Reserves = Transaction Deposits * Reserve Requirement

In this case, the required reserves would be:

Required Reserves = $500 million * 8% = $40 million

The initial balance sheet of Bank Three would be:

• Assets: Transaction Deposits - $500 million, Reserves - $40 million
• Liabilities: None

After the Federal Reserve decreases the reserve requirement to 5%, the new required reserves would be:

New Required Reserves = $500 million * 5% = $25 million

The new balance sheet of Bank Three after the reserve requirement change would be:

• Assets: Transaction Deposits - $500 million, Reserves - $25 million
• Liabilities: None