Introduction to Finance

a. 
What would be the dollar amount of required reserves?
b. 
What percentage of total transaction account balances held by 
Dell would be held as required reserves?
8. 
Show how your answers in Problem 6 would change if the Fed 
lowered the cut-off between the 2 percent rate and the 8 percent rate 
from $40 million in transaction account balances down to $20 million.
9. 
Challenge Problem 
You have been asked to assess the impact of 
possible changes in reserve requirement components on the dollar 
amount of reserves required. Assume the reserve percentages are set 
at 2 percent on the fi rst $50 million of transaction account amounts, 
4 percent on the second $50 million, and 10 percent on transaction 
amounts over $100 million. First National Bank has transaction 
account balances of $100 million, while Second National Bank’s 
transaction balances are $150 million and Third National Bank’s 
transaction balances are $250 million.
a. 
Determine the dollar amounts of required reserves for each of 
the three banks.
b. 
Calculate the percentage of reserves to total transactions accounts 
for each of the three banks.
c. 
The central bank wants to slow the economy by raising the re-
serve requirements for member banks. To do so, the reserve per-
centages will be increased to 12 percent on transaction balances 
above $100 million. Simultaneously, the 2 percent rate will apply 
on the fi rst $25 million. Calculate the reserve requirement amount 
for each of the three banks after these changes have taken place.
d. 
Show the dollar amount of changes in reserve requirement 
amounts for each bank. Calculate the percentage of reserve require-
ment amounts to transaction account balances for each bank.
e. 
Which of the two reserve requirement changes discussed in 
(c) causes the greatest impact on the dollar amount of reserves for 
all three of the banks?
f. 
Now assume that you could either (1) lower the transactions 
account amount for the lowest category from $50 million down 
to $25 million or (2) increase the reserve percentage from 
10 percent to 12 percent on transactions account amounts over 
$200 million. Which choice would you recommend if you were 
trying to achieve a moderate slowing of economic activity?

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