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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.

Instructions: Enter your answers as whole numbers in both tables below. Consolidated Balance Sheet: All Commercial Banks Assets: Reserves Securities Loans $ $ $ 34 58 62 $ $ $ 39 $ 58 $ 62 $ 27 $ 58 $ 62 $ 40 52 62 Liabilities and net worth: Checkable deposits Loans from the Federal Reserve Banks $ 150 $ 143 $ 159 150 4 $ $ $ 4 $ 4 Consolidated Balance Sheet: 12 Federal Reserve Banks deral Reserve Banks 1 2 3 Assets: Securities 66 $ $ 60 4 $ $ 60 9 $ $ 53 4 $ $ Loans to commercial banks 4 Liabilities and net worth: Reserves of commercial banks Treasury deposits 34 $ 39X $ 27% $ 40 % A 3 $ 3 3 27 $ $ 3 27 $ $ Federal Reserve Notes $ A 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 did not change. 2. Reserves increased from $34 billion to $ 39 billion. 3. Money-creating potential increased s 25 billion. Transaction b: 1. The money supply decreased $ 7 billion. 2. Reserves decreased from $34 billion to $ 27 billion. 3. Money-creating potential decreased by $ 35 billion. Transaction c: 1. The money supply did not change. 2. Reserves increased from $34 billion to $ 40 billion. 3. Money-creating potential increased by $ 30 billion

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