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 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 

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

Ans jabie canselidated halanee sheots diven or the commereja :- 1n dhe ok te and the 12 Federal Reserve Bank. Solution lA deeine in the dis eount aate promps comme- al bank to bo orow an aslditional 4 billfon Tom the Federal Reserve Banks- As cammeral banks borrowing 46illion amaunt b4 ederal Reserve Bank, So-ore îs jncregde The banks reserves Cnsolidated Balanu shast cammeicja Bank Cnsalidataol Balance Sheet : fedgral Reserve Bank Assets secuities ASset 37 (33+4) 60 Reserves Securihes Loanto Cammera Banks 3 Loans UabiliHes and latort tabilties and tetworth chadkab Dep 150 Res erves 37(33+4) Cammerca anky Treasury De posils fedaral ReseTve 34-4) w D federal Reseave 3 Baunks 27 Nutes The federeal Reserve Banks sell § 6 bill'on in Securies to menbers & Public, uhs pay b ands uith checks- As federal Reserre Bank sold d6 billî on secuuriHe w orth to Ccommoøeia) Banks to -the publi pas check

Consalidated Balance shoot fedoral Reserve 8 aaks ConsolidatidBalance sheet' e onmeria Banks Assets ASsels securiie 5460-6 Reserves 2 (93-3) - Leran He cOmmeresalbank Galtre ad okworth - 3 Secuie Loans Lablites and atworth checkable elapasits Lerang rom fedaral Reserve Banks Reserves & Commera Banks 27(33-) 154 (ttosi Treasury Deposi federal geserve 3 3 No res 2 The federal Reserve Banks securitieu rm A-s. federal Reserve Banku purehas 5 billi o1 securities worth eongalidateol Balane sheut CammesialBank Assets CAmmerea basks :- Commrial banks. Cnsoalatol 8alane sheat fedora) Reterve, Baak Assels Becunhe 38 (33+5) 455 (60-) 60 Reserve 6(6013) Secusities Laen Ho $3 Loans Commera bank Liabilitfesand etuorth chaekobale daposits uabilities and dat worth Reserves Commeri 4150 38(35+5) Loan banks 3 federa Roserve Bankg. Tremguy Deposi FedaralReserve Nores 3 27 Transactm a

he mna Supply does not char : Reserres increajes 1rom $33 bilign to 31 billio 3) Mon reak potena- 5x420 increase money mulple AS RR O 2 Transachion b The menay supply doereases by 6 billion 2 Reserve decreases from 331illian to $27 billion, 3)The money Creahng petenfaldereases 27(56) Trangactin e 27-30 2 4-3 The money supply does not choange 2) The Reserves increase fm33 billion to $38 blli09. potentential inereajeg k x)25 A money muuliplfeo z 5 RR