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In the tables that follow you will find consolidated balance sheets for the commercial banking system and the 12 Federal Reserve Banks. Use columns 1
In the tables that follow 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 cis completed. Do not cumulate your answers; that is, analyze each transaction separately, starting in each case from the numbers provided. All accounts are in billions of dollars a. A decline in the discount rate prompts commercial banks to borrow an additional $4 billion from the Federal Reserve Banks. Show the new balance sheet numbers in column 1 of each table b. The Federal Reserve Banks sell $6 billion in securities to members of the public, who pay for the bonds with checks. Show the new balance sheet numbers in column 2 of each table c. The Federal Reserve Banks buy $5 billion of securities from commercial banks. Show the new balance sheet numbers in column 3 of each table Instructions: Enter your answers as whole numbers in both tables below Consolidated Balance Sheet: All Commercial Banks 2 Assets: Reserves Securities Loans 34 58 62 Liabilities and net worth Checkable deposits 150 Loans from the Federal Reserve Banks $ 4 Consolidated Balance Sheet: 12 Federal Reserve Banks 2 Assets: Securities 60 Loans to commercial banks 4 Liabilities and net worth: Reserves of commercial banks$ Treasury deposit Federal Reserve Notes 34 27 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? Transaction a 1. The money supply from $34 billion to 2. Reserves billion. 3. Money-creating potential billion. Transaction b: 1. The money supply billion. from $34 billion to 2. Reserves billion. 3. Money-creating potential billion. Transaction c: 1. The money supply from $34 billion to 2. Reserves billion. 3. Money-creating potential billion
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