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 the initial reserve ratio is 20 percent. Fill in the appropriate columns of the balance sheets below for 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 a whole number. Place your answers in the gray-shaded cells using 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?
a) Column A
b) Column B
c) Column C