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 will 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 $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.
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 (Click to select) decreased /did not change/ increased.
2. Reserves increased/ decreased from $33 billion to $ billion.
Transaction b:
1. The money supply decreased / increased by $ billion.
2. Reserves increased / decreased from $33 billion to $ billion.
3. Money-creating potential increased/ decreased by $ billion.
Transaction c:
1. The money supply decreased /did not change /increased.
2. Reserves increased/ decreased from $33 billion to $ billion.
3. Money-creating potential decreased /increased by $ billion.
Answers: 1
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In the tables that follow you will find consolidated balance sheets for the commercial banking syste...
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