1. Chapter 10 Appendix The Fed’s Balance Sheet and the Monetary Base

2. Copyright ©2015 Pearson Education, Inc. All rights reserved.10-1 Chapter Preview In this appendix, we look closer at the Fed’s balance sheet – its assets and liabilities, and how changes manipulate the money supply.

3. Copyright ©2015 Pearson Education, Inc. All rights reserved.10-2 Chapter Preview Topics include: Assets Liabilities Monetary Base

4. Copyright ©2015 Pearson Education, Inc. All rights reserved.10-3 The Federal Reserve’s Balance Sheet Table 1 Consolidated Balance Sheet of the Federal Reserve System ($ billions, as of June 30, 2013)

5. Copyright ©2015 Pearson Education, Inc. All rights reserved.10-4 The Federal Reserve’s Balance Sheet: Assets The assets of the Fed include: ─ Securities: U.S. Treasury bills and bonds that the Federal Reserve has purchased in the open market. ─ Discount loans: Loans to member banks, referred to as borrowings from the Fed or borrowed reserves. ─ Gold and SDR certificate accounts: Special drawing rights (SDRs) replace gold in int’l financial transactions. ─ Coin: Treasury currency held by the Fed.

6. Copyright ©2015 Pearson Education, Inc. All rights reserved.10-5 The Federal Reserve’s Balance Sheet: Assets The assets of the Fed include: ─ Cash items in process of collection: checks in the process of clearing through the Fed system. ─ Other assets: buildings, office equipment, and assets denominated in foreign currencies.

7. Copyright ©2015 Pearson Education, Inc. All rights reserved.10-6 The Federal Reserve’s Balance Sheet: Liabilities The liabilities of the Fed include: ─ Federal Reserve notes outstanding: currency in circulation. ─ Reserves: bank assets held by the Fed, payable on demand. ─ U.S. Treasury deposits: The Treasury uses the Fed as its bank. ─ Foreign/other deposits: Non-Treasury deposits (foreign govts, World Bank, FDIC, etc.).

8. Copyright ©2015 Pearson Education, Inc. All rights reserved.10-7 The Federal Reserve’s Balance Sheet: Liabilities The liabilities of the Fed include: ─ Deferred-availability cash items: the liability arising from the check-clearing process. ─ Other Federal Reserve liabilities and capital accounts: Any liability of the Fed not listed in the other accounts.

9. Copyright ©2015 Pearson Education, Inc. All rights reserved.10-8 The Monetary Base Table 2 Summary Factors Affecting the Monetary Base

10. Copyright ©2015 Pearson Education, Inc. All rights reserved.10-9 The Monetary Base The monetary base is the sum of: 1.Federal Reserve notes outstanding (Fed liability) 2.Bank deposits or Reserves (Fed liability) 3.Treasury currency in circulation (Treasury liability) Often called high-powered money, an increase in the monetary base will lead to an increase in the money supply.

11. Copyright ©2015 Pearson Education, Inc. All rights reserved.10-10 The Monetary Base The monetary base is the sum of: 1.Federal Reserve notes outstanding (Fed liability) 2.Bank deposits or Reserves (Fed liability) 3.Treasury currency in circulation (Treasury liability) Items 1. and 3. are often lumped together and referred to as currency in circulation.

12. Copyright ©2015 Pearson Education, Inc. All rights reserved.10-11 The Monetary Base The monetary base can also be described by the sources of the base: MB = Securities + discount loans + gold and SDRs + float + other Federal Reserve assets + treasury currency = Treasury deposits - foreign and other deposits - other Federal Reserve liabilities and capital