Reference no: EM13209393

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 $3 billion from the Federal Reserve Banks. Show the new balance-sheet numbers in column 1 of each table.

b. The Federal Reserve Banks sell $5 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 $4 billion of securities from commercial banks. Show the new balance-sheet figures in column 3 of each table.

CONSOLIDATED BALANCE SHEET:
ALL COMMERCIAL BANKS

Assets: (1) (2) (3)
Reserves $33 $? $? $?
Securities 60 $? $? $?
Loans 60 $? $? $?

Liabilities and net worth:
Checkable deposits $150 $? $? $?
Loans from the Federal Reserve Banks 3 $? $? $?

CONSOLIDATED BALANCE SHEET:
TWELVE FEDERAL RESERVE BANKS

(1) (2) (3)

Assets:
Securities $60 $? $? $?
Loans to commercial banks 3 $? $? $?

Liabilities and net worth:
Reserves of commercial banks $33 $? $? $?
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 decreased OR did not change OR increased.
2. Reserves decreased OR increased from $33 to $?
3. Money-creating potential increased OR decreased by $ ?

Transaction b:

1. The money supply (Click to select)increaseddecreased by $ billion.
2. Reserves (Click to select)decreasedincreased from $33 to $ billion.
3. Money-creating potential (Click to select)increaseddecreased by $ billion.

Transaction c:

1. The money supply did not change OR increased OR decreased.
2. Reserves decreased OR increased from $33 to $?
3. Money-creating potential increased OR decreased by $?