Question

Assume that the city of Wakefield purchased a tract of land to be used as a public park. The purchase was financed with proceeds from a five-year note issued by a local lending institution. The park itself will not be ready for public use, however, for at least two years. At the date of purchase, the city would most likely account for the transaction in a) Operating activities section of the statement of cash flows

b) Financing activities section of the statement of cash flows
c) Investing activities section of the statement of cash flows
d) Neither operating nor investing activities section of the statement of cash flows

Answer 1

When the Fed buys $10 million in Treasury bonds from Acme Bank, Acme's reserves increase by $10 million, and bonds decrease by the same amount. If Acme creates new loans with this money, the balance sheet would show an increase in loans and a decrease in reserves, keeping the total assets the same.

Step-by-step explanation:

When the Federal Reserve conducts an open market purchase by buying Treasury bonds from a bank like Acme Bank, the bank's balance sheet will reflect these changes:

• Assets: Reserves increase by the amount of the bond purchase, while bonds decrease by the same amount.
• Liabilities: No initial change.

If Acme Bank converts the bond sale proceeds to new loans, then the balance sheet would further reflect an increase in loans under assets, but total assets remain unchanged since the reserves decrease by the same amount the loans increase.

Assuming the initial balance sheet provided, after Acme Bank sells $10 million in Treasury bonds to the Fed, the assets become:

• Reserves: 30 (original amount) + 10 (new reserve from bond sale)
• Bonds: 50 (original amount) - 10 (sold bonds)
• Loans: 50 (can increase by up to 10 if loans are made)

The liabilities side would remain:

• Deposits: 100
• Equity: 30

Lending out new loans results in:

• Reserves decrease by the amount lent out.
• Loans increase by the amount lent out.