Final answer:
After the Federal Reserve's open market purchase of Treasury bonds from Acme Bank, Acme's reserves increase, which they can use to issue new loans. The bank's balance sheet shows increased reserves, decreased bonds holdings, and a potential increase in loans without changing the overall deposits or equity.
Step-by-step explanation:
When the Federal Reserve conducts an open market purchase by buying $10 million in Treasury bonds from Acme Bank, specific changes occur on Acme Bank's balance sheet. This transaction increases Acme Bank's reserves by $10 million since they are selling treasury securities to the Fed. As a result, Acme Bank's assets would shift from bonds to reserves.
The initial Acme Bank balance sheet is:
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- Assets: reserves 30, bonds 50, and loans 50
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- Liabilities: deposits 100 and equity 30
After the open market purchase by the Fed, the balance sheet would now be:
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- Assets: reserves 40 (30 existing + 10 from bond sale), bonds 40 (50 original - 10 sold to Fed), and loans 50
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- Liabilities: deposits 100 and equity 30
When Acme Bank then converts the bond sale proceeds to new loans, their balance sheet would further adjust to:
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- Assets: reserves 40, bonds 40, and loans 60 (50 existing + 10 new from reserves)
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- Liabilities: deposits 100 and equity 30
The reserve requirement is not breached because only $10 million of new loans have been created, keeping the bank within its required reserve ratio, assuming it was already in compliance prior to the Fed's purchase.