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 c is 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.
(Please be careful with all those numbers that I BOLD, thank you)
Consolidated balance sheet: all commercial banks 1 2 3
Assets: reserve $34 ? ? ?
securities $58 ? ? ?
loans $62 ? ? ?
Liabilities and net worth: checkable deposits $150 ? ? ?
loans from the federal reserve banks $4 ? ? ?
Consolidated balance sheet: 12 federal reserve bank 1 2 3
Assets: securities $60 ? ? ?
Loans to commercial banks $4 ? ? ?
Liabilities and net worth: reserves of commercial banks $34 ? ? ?
treasury deposits $3 ? ? ?
federal reserve notes $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 ......?.....
2. Reserve .....?.........from $34 billion to ....?......billion.
3. Money- creating potential .....?........by ......?.......billion
Transaction b:
1. the money supply ......?..... by ....?......billion
2. Reserve .....?.........from $34 billion to ....?......billion.
3. Money- creating potential .....?........by ......?.......billion
Transaction c:
1. the money supply ......?.....
2. Reserve .....?.........from $34 billion to ....?......billion.
3. Money- creating potential .....?........by ......?.......billion