Final answer:
The Federal Reserve's open market purchase of Treasury bonds from Acme Bank leads to an increase in the bank's reserves and a decrease in bonds, with the potential to create new loans and activate the money multiplier effect. The bank's balance sheet will reflect these changes with adjustments made to the assets side while keeping the liabilities side stable.
Step-by-step explanation:
When the Federal Reserve (Fed) conducts an open market purchase of Treasury bonds from Acme Bank, the bank's balance sheet undergoes certain changes. If the Fed buys $10 million in Treasury bonds, the bonds will decrease from Acme Bank's assets, but the bank's reserves will increase by the same amount. With the additional reserves, Acme Bank can issue new loans. In this scenario, the balance sheet before the transaction shows $30 million in reserves, $50 million in bonds, $50 million in loans, $100 million in deposits, and $30 million in equity.
After the sale of bonds, the new balance sheet would display an increase in reserves to $40 million (an increase of $10 million due to the sale), bonds decreasing to $40 million (a decrease of $10 million), while deposits and equity remain the same. If the bank then decides to convert these reserves into new loans, the loans' value would increase and the reserves would decrease accordingly, maintaining the overall balance.The transactions involving issuance of the note and its first annual payment will have effects on the accounting equation. Let's analyze each transaction:Issuance of the note: This will increase the notes receivable account and increase the corresponding amount of the revenue earned from the note issuance.First annual payment: This will decrease the notes receivable account and decrease the amount of revenue earned from the note issuance. It will also decrease the cash account as the payment is madeOverall, these transactions will affect the balances of the notes receivable, revenue earned, and cash accounts on the balance sheetIt's critical to note that the influx of reserves increases the bank's capacity to lend and is a key driver of the money multiplier effect, which allows banks to create money through lending.