federal reserve requirements

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  1. Patriotic Bank currently has $800 million in transaction deposits on its balance sheet. The current reserve requirement is 10 percent, but the Federal Reserve is decreasing this requirement to 8 percent.
    • Present the balance sheet (before and after changes) of both the Federal Reserve and Patriotic Bank, if Patriotic Bank converts all excess reserves to loans, but borrowers return only 50 percent of these funds to Patriotic Bank as transaction deposits.
    • Present the balance sheet of both the Federal Reserve and Patriotic Bank, if Patriotic Bank converts 75 percent of its excess reserves to loans and borrowers return 60 percent of these funds to Patriotic Bank as transaction deposits.
  2. Assume that you are the manager of a firm. You are concerned about a potential increase in interest rates because it would reduce the demand for your products. Currently, economic growth is high, but annual inflation has increased from 3 percent to 5 percent within the last six months. The unemployment rate is very low and cannot go higher. The Federal Reserve (Fed) is meeting next week to assess economic conditions and set monetary policy.
    • Given the current economic situation, should the Fed adjust or not adjust economic policy? If so, how? If not, why?
    • Recently, the Fed has allowed the money supply to expand beyond its long-term target range. Does this affect your expectation of what the Fed will decide at its upcoming meeting?
  3. Suppose the Fed has just learned that the Treasury will need to borrow a larger amount of funds than originally expected. Explain how this information may affect the degree to which the Fed changes the monetary policy.

Your response must adhere to the following standards:

  • Be 2-4 pages in length, excluding the title or reference pages.
  • Display work for all calculations.
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