Final answer:
Acme Bank's balance sheet changes will reflect a decrease in bonds and an increase in reserves when the Fed purchases Treasury bonds. If the Fed sells bonds, Acme's reserves will decrease and bonds will increase, which may prompt a reduction in loans to maintain required reserves.
Step-by-step explanation:
Balance Sheet Changes from Open Market Operations
Let's sketch out the balance sheet changes for Acme Bank following an open market operation conducted by the Federal Reserve (the Fed). We'll examine two scenarios: one where the Fed purchases Treasury bonds from Acme Bank, and another where the Fed sells Treasury bonds to Acme Bank.
Open Market Purchase by the Fed
When the Fed conducts an open market purchase and buys $10 million in Treasury bonds from Acme Bank, Acme's balance sheet will reflect an increase in reserves by $10 million and a decrease in bonds by $10 million. After this transaction, Acme can convert these additional reserves into new loans. Assuming the entire $10 million is lent out:
Assets: Reserves will initially increase by $10 million to $40 million and then reduce as loans are made. If the entire amount is lent out, reserves will subsequently decrease. Bonds will decrease by $10 million to $40 million, and loans will increase by $10 million to $60 million.
Liabilities: Deposits and equity will not be directly affected by the sale of bonds to the Fed.
Open Market Sale by the Fed
If the Fed conducts an open market sale and sells $10 million in Treasury bonds to Acme Bank, Acme's balance sheet will show a decrease in reserves and an increase in bonds. To restore required reserves (say 10% of deposits), Acme may need to reduce loans:
Assets: Reserves decrease by $10 million to $20 million, bonds increase by $10 million, and loans decrease.
Liabilities: Deposits remain unchanged at $300 million; however, the adjustment in asset composition affects the equity or capital reserve requirements.
This analytical approach demonstrates how the actions of the Central Bank can directly impact bank reserves, lending capacity, and therefore, exert influence over the broader economy.