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 $5 billion from the Federal Reserve Banks. Show the new balance-sheet numbers in column 1 of each table.
b. The Federal Reserve Banks sell $7 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.
c. The Federal Reserve Banks buy $6 billion of securities from commercial banks. Show the new balance-sheet figures in column 3 of each table.
Instructions: All answers below are to be entered as whole numbers.
CONSOLIDATED BALANCE SHEET:
ALL COMMERCIAL BANKS
(1)(2)(3)
Assets:
Reserves$ 34$ $ $
Securities58
Loans62
Liabilities and net worth:
Checkable deposits$150$ $
Loans from the Federal Reserve Banks4
CONSOLIDATED BALANCE SHEET:
TWELVE FEDERAL RESERVE BANKS
(1)(2)(3)
Assets:
Securities$60$ $ $
Loans to commercial banks4
Liabilities and net worth:
Reserves of commercial banks$34$ $ $
Treasury deposits3
Federal Reserve Notes27
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%u2019 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. Reservesfrom $34 to $billion.
3. Money-creating potentialby $billion.
Transaction b:
1. The money supply___by $billion.
2. Reservesfrom $34 to $billion.
3. Money-creating potentialby $billion.
Transaction c:
1. The money supply.
2. Reserves___from $34 to $billion.
3. Money-creating potentialby $___billion.