Final answer:
The Fed's purchase of Treasury bonds leads to an increase in Acme Bank's reserves and a decrease in its bonds holdings. The conversion of these reserves to new loans shifts the composition of assets from reserves to loans, while liabilities and equity remain initially unchanged. The total assets continue to balance with liabilities and equity.
Step-by-step explanation:
The question pertains to how a transaction involving the Federal Reserve (the Fed) conducting an open market purchase affects the accounting equation for Acme Bank. The Fed's purchase of $10 million in Treasury bonds from Acme will lead to a change in the bank's balance sheet. Specifically, the sale of the bonds will decrease Acme's assets in the bonds category and increase its reserves (also an asset) by the same amount, keeping the asset side of the balance sheet balanced. As Acme then converts the bond sale proceeds into new loans, the composition of its assets changes further: reserves will decrease, while the loans category will increase.
Using the initial balance sheet figures provided, the sale of bonds for $10 million would alter Acme's assets as follows: reserves would initially increase to $40 million (from $30 million), and bonds would decrease to $40 million (from $50 million). When Acme converts these reserves into new loans, the reserves would decrease while the loans would increase, but the total assets would remain the same. On the liabilities side, there is initially no change because the transaction is between Acme and the Fed; however, the capacity to create more loans may lead to future changes in liabilities through the acceptance of more deposits.
Net worth remains unchanged at $30 million, assuming there are no earnings or losses from the transaction. It is important to recognize that while the total assets and liabilities plus equity must always balance, this transaction represents a change in the composition of assets.