Question

Which of the following would be considered an internal exchange transaction?

a. The General Fund transfers $9,000 tothe Central Supplies Fund for supplies it received from Central Supplies.
b. The General Fund transfers $200,000 to establish a Central Supplies Fund; this amount will not be repaid.
c. The General Fund transfers $125,000 to the Debt Service Fund for payment of currently due bond interest payments.
d. The Capital Projects Fund completes a library building project and transfers the remaining cash to the Debt Service Fund.

Answer 1

The Fed's open market purchase of Treasury bonds from Acme Bank will increase the bank's reserves and decrease its bonds by $10 million. Acme Bank can, in turn, lend out these new reserves, thereby increasing loans and potentially influencing the economy as part of the Fed's monetary policy.

Step-by-step explanation:

When the Federal Reserve conducts an open market purchase by buying Treasury bonds from a bank, it increases the bank's reserves. In the scenario with Acme Bank, the initial balance sheet shows, under assets, reserves at $30 million, bonds at $50 million, and loans at $50 million. The liabilities show deposits at $100 million and equity at $30 million.

After the Fed purchases $10 million in Treasury bonds from Acme Bank, Acme's reserves increase by $10 million since they receive cash for the bonds. The bonds held by the bank decrease by $10 million on the assets side. In turn, Acme Bank can use this increase in reserves to extend new loans.

This operation is a part of the monetary policy tools used by the Fed to manage liquidity in the banking system and influence the overall economy.