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In: Economics

In the tables that follow you will find consolidated balance sheets for the commercial banking system...

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.

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

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