Final answer:
The Fed's sale of Treasury bonds to Acme Bank decreases Acme's reserves by $10 million, which they offset by reducing loans by the same amount to maintain required reserves of 10% of deposits. After restoring the reserves, both assets and liabilities decrease, keeping the balance sheet balanced and meeting the reserve requirements.
Step-by-step explanation:
When the Federal Reserve (Fed) conducts an open market sale and sells Treasury bonds to a bank, such as Acme Bank, it impacts the bank's balance sheet. Initially, Acme Bank's balance sheet lists reserves of $30 million, bonds worth $50 million, and loans totaling $250 million against liabilities that include deposits of $300 million and equity of $30 million.
After Acme Bank purchases $10 million in bonds from the Fed, its reserves decrease by $10 million, since they pay cash for the bonds, and its bond holdings increase by the same amount. This transaction does not immediately affect the bank's loans or deposits. However, to maintain the required reserve ratio of 10% of deposits, Acme Bank needs at least $30 million in reserves ($300 million in deposits x 10%). Following the bond purchase, reserves have decreased to $20 million, which is below the required level.
To restore the required reserves, Acme Bank must reduce its loans by $10 million. On the asset side of the balance sheet, this action reduces the $250 million in loans. The liabilities side initially remains unchanged, but the bank has to offset this by reducing deposits through methods like not rolling over loans or selling assets. Consequently, the assets and liabilities would both decrease, restoring the reserve ratio to compliance with regulatory requirements.