Final answer:
After the Fed's purchase of Treasury bonds from Acme Bank, the bonds asset decreases while reserves initially increase. When Acme converts these to new loans, its loans asset increases with a corresponding increase in deposits liabilities, maintaining balance sheet equilibrium.
Step-by-step explanation:
When the Federal Reserve (Fed) conducts an open market purchase of Treasury bonds, such as buying $10 million from Acme Bank, there are immediate changes to Acme Bank's balance sheet. Firstly, Acme's assets under 'bonds' will decrease by the amount sold to the Fed. With the balance sheet initially showing $50 million in bonds, after selling $10 million, this category would reduce to $40 million. However, Acme's reserves will increase by the amount of cash received, in this case also $10 million, adjusting the 'reserves' from $30 million to $40 million. Consequently, the total assets before and after the transaction remain unchanged.
If Acme decides to convert the bond sale proceeds into new loans, the cash from reserves would shift to the 'loans' category. This means that the 'loans' category increases from the initial $50 million by another $10 million, totaling $60 million. The reserves would return to $30 million. The important thing to remember here is that due to the fractional banking system, Acme may actually lend out multiples of the initial $10 million received, depending on the required reserve ratio, but for simplicity, we're assuming they lend out the entire amount.
On the liabilities side, assuming all loans are deposited back into the bank, the 'deposits' category would likewise increase by the amount of the new loans created, ensuring that the liabilities side balances with the assets side. If initially deposits were $300 million, they would now become $310 million, corresponding with the increase in 'loans' on the assets side.