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 numbers in column 2 of each table. c. The Federal Reserve Banks buy $4 billion of securities from commercial banks. Show the new balance sheet numbers in column 3 of each table.
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.
Instructions: Enter your answers as a whole number.
a. A decline in the discount rate prompts commercial banks to borrow an additional $3 billion from the Federal Reserve Banks. Show the new
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 numbers in column 2 of each table.
c. The Federal Reserve Banks buy $4 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: did not change (correct answer)
(2) Reserves: increased (correct answer)
from $33 billion to $ billion __?___
(3) The money-creating potential: increased (correct answer)
by $ billion __?___
Transaction b:
(1) The money supply: decreased (correct answer)
by $ billion. __?___
(2) Reserves: decreased (correct answer)
from $33 billion to $ billion. ___?___
(3) The money-creating potential: decreased (correct answer)
by $ billion. ___?___
Transaction c:
(1) The money supply: did not change (correct answer)
(2) Reserves: increased (correct answer)
from $33 billion to $ billion. ___?___
(3) The money-creating potential: increased (correct answer)
by $ billion. ___?____
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