Answered: In the tables that follow you will find…

Economics (MindTap Course List)

13th Edition

ISBN:9781337617383

Author:Roger A. Arnold

Publisher:Roger A. Arnold

Chapter12: Money, Banking And The Financial System

Section: Chapter Questions

Problem 15QP

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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 $2 billion from the Federal Reserve Banks. Show the new balance sheet numbers in column 1 of each table.

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

SEE PICTURE !!!

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 $2 billion from the Federal Reserve Banks. Show
the new balance sheet numbers in column 1 of each table.
b. The Federal Reserve Banks sell $4 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 $3 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.
Consolidated Balance Sheet: All Commercial Banks
2
Assets:
Reserves
33
$
34
2$
30 $
35
Securities
60
$
60
2$
60
$
58
Loans
60 $
60
%2$
60
2$
60
Liabilities and net worth:
Checkable deposits
150
Loans from the Federal Reserve Banks
Consolidated Balance Sheet: 12 Federal Reserve Banks
1
2
3
Assets:
Securities
$
60 $
60
Loans to commercial banks
$
3
2$
3
Liabilities and net worth:
Reserves of commercial banks
$
33
Treasury deposits
2$
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
from $33 billion
to
2. Reserves
billion.
3. Money-creating potential
by
billion.
Transaction b:
1. The money supply
by
billion.
from $33 billion
to
2. Reserves
billion.
3. Money-creating potential
by
billion.
Transaction c:
1. The money supply
2. Reserves
from $33 billion
billion.
to
3. Money-creating potential
by
billion.

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