Final answer:
An open market sale of Treasury bonds by the Fed to Acme Bank decreases Acme Bank's reserves and requires balancing the balance sheet by adjusting loans to restore required reserves, maintaining the overall balance of assets and liabilities.
Step-by-step explanation:
When the Federal Reserve (the Fed) conducts an open market sale by selling Treasury bonds to a bank, in this case Acme Bank, this impacts the bank’s balance sheet. The sale of $10 million in Treasury bonds to Acme Bank would show an increase in Acme Bank’s bonds assets by $10 million and a corresponding decrease in their reserves by $10 million because they have paid for the bonds. In response to this action and to meet the required reserve ratio of 10% of deposits, Acme Bank needs to adjust its loans.
Before the bond sale, Acme Bank had reserves of $30 million. After purchasing the bonds, the reserves fall to $20 million ($30 million - $10 million from bond purchase). The required reserves on deposits of $300 million are $30 million (10% of $300 million). Because the reserves are now $10 million less than the required amount, Acme would need to reduce its loans by at least $10 million to meet the reserve requirement (unless they acquire reserves through other means).
Here is how Acme Bank's balance sheet would look after adjusting for the bond purchase and the restoration of required reserves:
- Assets: reserves $20 million (-$10 million), bonds $60 million (+$10 million), loans $240 million (-$10 million)
- Liabilities: deposits $300 million (no change), equity $30 million (no change)