Final answer:
When the Federal Reserve buys Treasury bonds from a bank, like Acme Bank in this scenario, the bank's reserves increase by the amount of the sale, which then allows the bank to issue new loans. The balance sheet reflects a decrease in bonds and an increase in reserves initially, and then potentially in loans and deposits as new loans are made.
Step-by-step explanation:
When the Federal Reserve (the Fed) conducts an open market purchase by buying Treasury bonds from a bank, this increases the bank's reserves. In the scenario with Acme Bank, the Fed purchases $10 million in Treasury bonds. As a result, Acme Bank's assets will experience a decrease in bonds by $10 million but an increase in reserves by the same amount. Subsequently, Acme Bank can use these additional reserves to extend new loans. Before the transaction, Acme's balance sheet showed reserves of $30 million, bonds of $50 million, and loans of $50 million as assets. After the transaction, the balance sheet reflects reserves of $40 million (initial $30 million + $10 million from the sale), bonds decrease to $40 million (initial $50 million - $10 million sold), and loans remain at $50 million initially. Once Acme Bank decides to issue new loans from these proceeds, the balance sheet will show an increase in loans by up to $10 million, the amount of the new reserves, assuming they lend out the full amount of the increase in reserves.
Here's a simplified version of how the balance sheet might change: Assets :Reserves increase by $10 million Bonds decrease by $10 million Loans increase by up to $10 million (when new loans are made)Liabilities: Deposits increase by up to $10 million (as new loans create new deposits) Equity remains unchanged at $30 million. The effect of ABC Company's cash purchase of $1,690 worth of equipment is a decrease in the company's cash and an increase in its equipment. When ABC Company pays cash to purchase the equipment, its cash balance decreases by $1,690. At the same time, the equipment account on its balance sheet increases by $1,690 to reflect the value of the new equipment.