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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 bilions 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 numbers 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 numbers in column 2 of each table. c. The Federal Reserve Banks buy $2 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 3 $ Assets: Reserves Securities Loans $33 60 60 S 37 s 60S 60 S 27S 60$ 60 $ 38 55 60 $ Liabilities and net worth: Checkable deposits Loans from the Federal Reserve Banks $ 144 $ 150 $150 3 150s S $ Consolidated Balance Sheet: 12 Federal Reserve Banks Assets: Securities Loans to commercial banks S60 60 54 65 3 Liabilities and net worth: Reserves of commercial banks $33 37 $ 27 $ 38 Treasury deposits 3 S 3 $ Federal Reserve Notes 27 $ 27 $ 27 s 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 did not change 2. Reserves increased from 533 bilion to $ 37 billion 3. Money-creating potential increased by $20 billion Transaction b: 1. The money supply decreased by $6 billion 2. Reserves decreased from $33 billion to $27 billion + 3. Money-creating potential decreased by $30 billion Transaction c: 1. The money supply did not change 2 Reserves increased from 533 bilion to S 30 billion 3. Money-creating potential increased by $25 bilion
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