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commercial banking system

1. Key Question
In the table on page 289 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 figures provided. All accounts are in billions of dollars.
1. Â 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 figures in column 1 of each table.
Consolidated Balance Sheet: All Commercial Banks
(1) (2) (3)
Assets:
Reserves $33 ______ ______ ______
Securities 60 ______ ______ ______
Loans 60 ______ ______ ______
Liabilities and net worth:
Checkable deposits $150 ______ ______ ______
Loans from the Federal
Reserve Banks 3 ______ ______ ______

Consolidated Balance Sheet: The 12 Federal Reserve Banks
(1) (2) (3)
Assets:
Securities $60 ______ ______ ______
Loans to commercial banks 3 ______ ______ ______
Liabilities and net worth:
Reserves of commercial banks $33 ______ ______ ______
Treasury deposits 3 ______ ______ ______
Federal Reserve Notes 27 ______ ______ ______
3. 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 figures in column 2 of each table.
4. The Federal Reserve Banks buy $2 billion of securities from commercial banks. Show the new balance-sheet figures in column 3 of each table.
5. 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?

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Money supply as a direct and immediate result takes place in terms of checkable deposits. This happened only in case of (2) where securities were sold to the public and money supply decreased by ...

Solution Summary

Money supply as a direct and immediate result is assessed.

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