In the accompanying tables you will find consolidated balance sheets for the commercial banking system and the

Question:

In the accompanying tables you will find consolidated balance sheets for the commercial banking system and the 12 Federal Reserve Banks. Use columns 1 through 3 to indicate how the balance sheets would read after each of transactions a to c is completed. Do not cumulate your answers; that is, analyze each transaction separately, starting in each case from the figures provided. All accounts are in billions of dollars.

a. A decline in the discount rate prompts commercial banks to borrow an additional $1 billion from the Federal Reserve Banks. Show the new balance-sheet figures in column 1 of each table.

b. The Federal Reserve Banks sell $3 billion in securities to members of the public, who pay for the bonds with checks. Show the new balance-sheet figures in column 2 of each table.

In the accompanying tables you will find consolidated balance sh

c. The Federal Reserve Banks buy $2 billion of securities from commercial banks. Show the new balance-sheet figures in column 3 of each table.

d. Now review each of the above three transactions, asking yourself these three questions:

(1) What change, if any, took place in the money supply as a direct and immediate result of each transaction?

(2) What increase or decrease in the commercial banks’ reserves took place in each transaction?

(3) Assuming a reserve ratio of 20 percent, what change in the money-creating potential of the commercial banking system occurred as a result of each transaction?

Discount Rate
Depending upon the context, the discount rate has two different definitions and usages. First, the discount rate refers to the interest rate charged to the commercial banks and other financial institutions for the loans they take from the Federal...