Question

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 cis 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 $6 billion from the Federal Reserve Banks. Show the new balance sheet numbers in column 1 of each table. 

b. The Federal Reserve Banks sell $8 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 $7 billion of securities from commercial banks. Show the new balance sheet numbers in column 3 of each table. Instructions: Enter your answers as whole numbers in both tables below. 

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? 

Answer 1

(Please if you have any doubt ask in the comment section and do UPVOTE the answer, Thank you)

Transaction a: 1) The money supply does not change. 2) Reserves increase $33 billion to $39 billion. 3) Money creating potential 5*6=$30 billion increase [ As money multiple = 1/RR = 1/0.2 =5] Transaction b: 1) The money supply decrease by $8 billion 2) Reserves decreases from $33 billion to $25 billion 3) The money creating potential decreases by $25-(5x8) = $25-$40 = $-15 billion Transaction c: 1) The money supply does not change 2) The reserves increases from $33 billion to $40 billion 3) Money creating potential increase by (5x7) = $35 billion