Final answer:
Following an open market purchase by the Fed, Acme Bank's reserves increase, allowing additional loans to be issued. The balance sheet would show an increase in reserves and loans and a decrease in bonds held.
Step-by-step explanation:
When the Federal Reserve (Fed) conducts an open market purchase of Treasury bonds from Acme Bank, there are several balance sheet changes. Initially, Acme Bank holds $30 million in reserves, $50 million in bonds, and has $50 million in loans. The deposits and equity are $100 million and $30 million respectively. Upon the Fed purchasing $10 million in Treasury bonds from Acme Bank, Acme's reserves would increase by $10 million, as they receive cash for the bonds.
After the sale, Acme Bank would then have $40 million in reserves (initial $30 million + $10 million from the bond sale) and $40 million in bonds (initial $50 million - $10 million sold). With increased reserves, Acme Bank is equipped to issue additional loans. Assume they decide to loan out all of the new reserves; the loans on the balance sheet would increase by $10 million to $60 million (initial $50 million + $10 million in new loans).
The balance sheet would then reflect the following: Assets - reserves $40, bonds $40, and loans $60; Liabilities - deposits $100 and equity $30. The increase in loans denotes the potential for future interest income, which contributes to the revenue and profitability of the bank.