Use commercial bank and Federal Reserve Bank balance sheets to demonstrate the i
ID: 1221859 • Letter: U
Question
Use commercial bank and Federal Reserve Bank balance sheets to demonstrate the immediate effect of each of the following transactions on commercial bank reserves. Assume that the initial reserve ratio is 20 percent. Fill in the new balances in the column in the balance sheets that correspond with each of the following transactions. Consider each transaction separately, not cumulatively.
a. Federal Reserve Banks purchase $2 billion worth of securities from banks.
b. Commercial banks borrow $1 billion from Federal Reserve Banks at the discount rate.
c. The Fed reduces the reserve ratio from 20 percent to 19 percent.
Instructions: Enter your answers as whole numbers in the gray-shaded cells of both tables below.
Consolidated Balance Sheet: All Commercial Bank
A
B
C
Assets:
Reserves
$40
Securities
60
Loans
102
Liabilities and Net Worth:
Checkable deposits
200
Loans from the Federal Reserve Banks
2
Consolidated Balance Sheet: 12 Federal Reserve Banks
A
B
C
Assets:
Securities
$283
Loans to Commercial Banks
2
Liabilities and Net Worth:
Reserves of Commercial Banks
40
Treasury Deposits
5
Federal Reserve Notes
225
Other Liabilities and Net Worth
15
d. Commercial banks increase their reserves after the Fed increases the interest rate it pays on reserves.
Which of the columns above could represent this action?
Select one
Column A
Column B
Column C
Consolidated Balance Sheet: All Commercial Bank
A
B
C
Assets:
Reserves
$40
Securities
60
Loans
102
Liabilities and Net Worth:
Checkable deposits
200
Loans from the Federal Reserve Banks
2
Explanation / Answer
Consolidated Balance Sheet: All Commercial Bank
A
B
C
Assets:
Reserves
$40
$42
41
38
Securities
60
58
60
60
Loans
102
$102
102
104
Liabilities and Net Worth:
Checkable deposits
200
200
200
200
Loans from the Federal Reserve Banks
2
2
3
2
Consolidated Balance Sheet: 12 Federal Reserve Banks
A
B
C
Assets:
Securities
$283
285
283
283
Loans to Commercial Banks
2
2
3
2
Liabilities and Net Worth:
Reserves of Commercial Banks
40
40
40
38
Treasury Deposits
5
5
5
5
Federal Reserve Notes
225
225
225
225
Other Liabilities and Net Worth
15
13
14
17
d. Column A
If you don't understand then comment, I'ill revert back on the same. :)
Consolidated Balance Sheet: All Commercial Bank
A
B
C
Assets:
Reserves
$40
$42
41
38
Securities
60
58
60
60
Loans
102
$102
102
104
Liabilities and Net Worth:
Checkable deposits
200
200
200
200
Loans from the Federal Reserve Banks
2
2
3
2
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