Question

The following sclected transactions occurred for Corner Corporation: rebroary 2 Ferohased 430 -horen of the eoepany'a con combon stoek at t23 cash per shate; the atsek is bov held in treasury. July is Isaund 115 of the shree porehased ee rebruary 1 for 133 eash per shere. sebtenter I teaved is note of the ehatet purehased on rebruary I for s1s cash per share. Required: 1. Indicate the account, amount and direction of the effect for the above transactions. (Enter any decreases to account balances with a minus sign.)

Answer 1

When the Fed purchases Treasury bonds, Acme Bank's reserves increase by the sale amount, bonds decrease, and the bank can issue new loans. The liabilities remain unchanged.

Step-by-step explanation:

When the Federal Reserve (Fed) conducts an open market purchase of Treasury bonds from Acme Bank, there are specific changes that occur on Acme Bank's balance sheet. Initially, if Acme Bank sells $10 million in Treasury bonds to the Fed, its reserves would increase by $10 million, and its bonds holdings would decrease by the same amount. Subsequently, Acme can convert the new reserves into new loans. Here's how the balance sheet would look after the transaction and the conversion into new loans:

• Assets: Reserves increase from 30 to 40 (due to the $10 million sale), bonds decrease from 50 to 40, and loans increase from 50 to 60.
• Liabilities: Remain unchanged as deposits are 100 and equity 30.

The purchase of securities by the Fed adds reserves to the banking system, allowing banks like Acme to extend additional loans, which can stimulate economic activity.