Final answer:
The issuance of a loan results in a debit to the loan account (asset) and a credit to the cash or reserves account on the lender's balance sheet. Depositing the loan check into a different bank leads to an increase in that bank's deposits and reserves, with a corresponding debit and credit entry. Open market purchases by the Fed increase a bank's reserves, permitting it to offer more loans.
Step-by-step explanation:
The subject of this question is related to the accounting and business practices of banks when they issue loans. When Singleton Bank lends $9 million to Hank's Auto Supply, it would record the transaction as an asset on its balance sheet because the loan will generate interest income over time. In accounting terms, when a loan is issued, the bank debits the loan account (asset), reflecting that there is money owed to it, while similarly crediting its cash or reserves, because it has provided that cash to the borrower.
Similarly, when First National receives the $9 million deposit from Hank, it will increase its deposits and reserves by the same amount. According to reserve requirement regulations, First National must hold 10% of the deposit, in this case, $900,000, as required reserves. The remaining $8.1 million becomes excess reserves, which can be loaned out to other bank customers. Therefore, if Hank deposits the cashier's check, First National's balance sheet would show a debit to the bank's cash account (reserves) and a corresponding credit to the deposit liabilities.
When the Federal Reserve conducts an open market purchase like buying Treasury bonds from Acme Bank, Acme's reserves will increase by the amount of the purchase. In the example provided, Acme's reserves will increase by $10 million while its bond holdings decrease by the same amount, which will allow Acme to extend new loans with these increased reserves.