The following net transaction accounts and cash reserves at the Federal Reserve have been documented by a bank for computation of its reserve requirements (in millions) under lagged reserve accounting. November Monday Tuesday Wednesday Thursday 5th Friday 6th 2nd 3rd 4th $220 $9 Tuesday 10th $250 $12 Tuesday 17th $220 $7 Friday 13th $280 $6 Fridzy 20th Net Transaction Accounts $230 $200 $11 Wednesday 11th $250 $9 Wednesday 1sth $190 Reserves at Fed S10 Monday 9th $170 S8 Thursday 12th $220 Net Transaction Accounts Reserves at Fed $5 Thursday Mondzy 16 $210 19th Net Transaction Accounts $310 $7 Tuesday 24th $340 $6 Wednesday $180 $160 $6 Friday 27th Reserves at Fed $5 Monday 23th Thursday 26th 25th Net Transaction Accounts $270 $8 Tuesday Ist $350 $12 Tuesday $150 $4 Wednesday 2nd $250 $1 Wednesday $250 $9 $250 S5 $280 $7 Reserves at Fed December Monday 30th $340 Thursday 3rd $240 Friday 4th $220 $9 Friday 1lth Net Transaction Accounts Reserves at Fed $1 $10 Monday Thursday 10th 7th Sth 9th Net Transaction Accounts Reserves at Fed $310 $10 Wednesday $310 $8 Friday 18th $280 $290 $11 Tuesday $310 $9 Thursday 17th $12 Mondzy 14th 15th 16th $200 $320 Net Transaction Accounts Reserves at Fed $170 $290 $280 $5 Friday 25 $200 $7 S9 $8 Tuesday 22th $5 S7 Monday 21th $190 Wednesday 23th Thursday 24th Net Transaction Accounts $280 $14 $250 $9 $220 Reserves at Fed $11 Suppose we are focusing on the computation period beginning on November 10th. The average vault cash for this computation period is $3 million per day. a) What are the average daily net transaction accounts over the computation period? b) What level of average daily reserves is required to be held by the bank with the Federal Reserve during the corresponding maintenance period? C) Do the bank's reserves at the Federal Reserve during the maintenance period meet the reserve requirements? Suppose there are no previous reserve deficits carried over.

Exploring Economics

8th Edition

ISBN:9781544336329

Author:Robert L. Sexton

Publisher:Robert L. Sexton

Chapter25: Money, Banking, And The Federal Reserve System

Section: Chapter Questions

Problem 13P

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Question

The following net transaction accounts and cash reserves at the Federal Reserve have been documented
by a bank for computation of its reserve requirements (in millions) under lagged reserve accounting.
November
Monday
Tuesday
Wednesday
Thursday
5th
Friday
6th
2nd
3rd
4th
$220
$9
Tuesday
10th
$250
$12
Tuesday
17th
$220
$7
Friday
13th
$280
$6
Fridzy
20th
Net Transaction Accounts
$230
$200
$11
Wednesday
11th
$250
$9
Wednesday
1sth
$190
Reserves at Fed
S10
Monday
9th
$170
S8
Thursday
12th
$220
Net Transaction Accounts
Reserves at Fed
$5
Thursday
Mondzy
16
$210
19th
Net Transaction Accounts
$310
$7
Tuesday
24th
$340
$6
Wednesday
$180
$160
$6
Friday
27th
Reserves at Fed
$5
Monday
23th
Thursday
26th
25th
Net Transaction Accounts
$270
$8
Tuesday
Ist
$350
$12
Tuesday
$150
$4
Wednesday
2nd
$250
$1
Wednesday
$250
$9
$250
S5
$280
$7
Reserves at Fed
December
Monday
30th
$340
Thursday
3rd
$240
Friday
4th
$220
$9
Friday
1lth
Net Transaction Accounts
Reserves at Fed
$1
$10
Monday
Thursday
10th
7th
Sth
9th
Net Transaction Accounts
Reserves at Fed
$310
$10
Wednesday
$310
$8
Friday
18th
$280
$290
$11
Tuesday
$310
$9
Thursday
17th
$12
Mondzy
14th
15th
16th
$200
$320
Net Transaction Accounts
Reserves at Fed
$170
$290
$280
$5
Friday
25
$200
$7
S9
$8
Tuesday
22th
$5
S7
Monday
21th
$190
Wednesday
23th
Thursday
24th
Net Transaction Accounts
$280
$14
$250
$9
$220
Reserves at Fed
$11
Suppose we are focusing on the computation period beginning on November 10th. The average vault cash
for this computation period is $3 million per day.
a) What are the average daily net transaction accounts over the computation period?
b) What level of average daily reserves is required to be held by the bank with the Federal Reserve during
the corresponding maintenance period?
C) Do the bank's reserves at the Federal Reserve during the maintenance period meet the reserve
requirements? Suppose there are no previous reserve deficits carried over.

Expert Solution

Step 1

a. The average is calculated by summing up the net transaction and dividing it by the number of days. It is $255.88 millions per day.

b. Under the rule of 2004, the reserve required is

0*6+(42.1-6)*(0.03)+(255.88-42.1)*(0.10)=22.461 M

subtracting the 3M cash in vault, the bank needed (22.461-3)=19.461M in reserves in Fed.

c. The average reserves in fed during the period is 8.32 M.

So the bank is short by 11.141M

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