In the table below you will find consolidated balance sheets lot the commercial
ID: 1196331 • Letter: I
Question
In the table below you will find consolidated balance sheets lot the commercial banking system and the 12 Federal Reserve Banks. Use columns a through c to indicate how the balance sheets would read after each of transition from parts a through C is completed. Do not cumulate your answers between questions. Analyze each transaction separately by starting in each case from the figures provided. All accounts are in billions of dollars. 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 figures in column (a) of each table. The Federal Reserve Banks buy $5 billion of securities from commercial banks. Show the new balance-sheet figures in column (b) of each table. The Federal Reserve Banks sell $7 billion in securities to members of the public, who pay for the bonds with checks. Show the new balance-sheet figures in column (c) of each table. Now, explain what happens to the money supply from transaction (c). What is the difference between the discount rate and the federal funds rate?Explanation / Answer
Consolidated balanced sheet: All commercial Banks
Consolidated balanced sheet: 12 Federal Reserve Banks
d. Money supply decreases with transaction c. When zfederal reserve sells $7 billion securitis ot member soof the public who pay for bonds with checks, the money in the hands of general public decreases. It decreases money supply.
e. The fed funds rate is the interest rate that depository institutions—banks, savings and loans, and credit unions—charge each other for overnight loans. The discount rate is the interest rate that Federal Reserve Banks charge when they make collateralized loans—usually overnight—to depository institutions.
Assets Original a b c Reserve 33 36 36 36 Securities 60 60 55 62 Loans 60 60 60 60 Liabilities checkable Deposits 150 150 145 152 Loans with Federal Reserve Banks 3 6 6 6