<p>The sale of the bonds (assets) will only affect the assets-side of the balance sheet.</p>

<p>If Acme bank did not lend out the money, your “bonds” would go 50-10 = 40. And your cash would go 0+10 = 10.</p>

<p>If they lend out the money, bonds still go to 40 and lending goes up by 10, so 50+10 = 60.</p>

CC BY-SA 3.0
2018-04-07T10:05:23.837Z
That may be a little over simplified in that (a) cash is uncommon in today's banking and (b) initially at least a loan will increase both sides of a bank's balance sheet
Henry
CC BY-SA 3.0
2018-04-07T10:18:59.900Z
@Henry you mean an oversimplified answer to this very detailed question? Further a) cash in relations to modern day banking is not the same physical cash and b) depends on how it is structured.
ssn
CC BY-SA 3.0
2018-04-06T11:24:34.963Z
2018-04-06T11:24:34.963Z
ssn
<p>Like @ssn, I would be happier if the balance sheet balanced, so let's suppose the original question said <em>"the initial Acme bank balance sheet contains the following information: Assets – reserves 30, bonds 50, and loans 50; Liabilities – deposits <strong>1</strong>00 and equity 30"</em>, looking like:</p>

<pre><code> Assets               Liabilities

 reserves  30         deposits  100
 bonds     50         equity     30
 loans     50             
          ---                   ---
          130                   130
</code></pre>

<p>The impact of the sale of 10 worth of bonds to the Fed is simple as Acme Bank will increase its reserves at the Fed</p>

<pre><code> Assets               Liabilities

 reserves  40         deposits  100
 bonds     40         equity     30
 loans     50             
          ---                   ---
          130                   130
</code></pre>

<p>Perhaps Acme Bank then lends 10 to a customer, crediting that customer's deposit account</p>

<pre><code> Assets               Liabilities

 reserves  40         deposits  110
 bonds     40         equity     30
 loans     60             
          ---                   ---
          140                   140
</code></pre>

<p>The customer then spends the 10 on something (otherwise why borrow?), and presumably instructs Acme Bank to transfer 10 from the customer's deposit account to its supplier's bank, which Acme does by transferring some reserves at the Fed, making Acme's balance sheet look like </p>

<pre><code> Assets               Liabilities

 reserves  30         deposits  100
 bonds     40         equity     30
 loans     60             
          ---                   ---
          130                   130
</code></pre>

CC BY-SA 3.0
2018-04-07T22:06:07.213Z
Maybe there was a mistake in the problem. The above looks much better. I will try to clarify with someone from class.
lcuddy89
CC BY-SA 3.0
2018-04-07T09:58:04.507Z
2018-04-07T09:58:04.507Z
Henry
<p>Suppose the Fed conducts an open market purchase by buying $10 million in Treasury bonds from Acme Bank. Sketch out the balance sheet changes that will occur as Acme converts the bond sale proceeds to new loans. The initial Acme bank balance sheet contains the following information: Assets – reserves 30, bonds 50, and loans 50; Liabilities – deposits 300 and equity 30.</p>

CC BY-SA 3.0
2018-04-06T11:18:38.737Z
Your balance sheet is not balancing to begin with, so something is off already.
ssn
CC BY-SA 3.0
2018-04-06T11:42:22.533Z
Ssn are saying that because the bank is running at very low fraction of its deposits?
marshal craft
CC BY-SA 3.0
2018-04-06T11:46:17.887Z
And seems pretty simple, bonds are now 40, loans are 60 not accounting for interest in loans and yield on bonds. What was confusing you that you need to ask?
marshal craft
CC BY-SA 3.0
2018-04-06T13:34:43.697Z
I wasn't sure if I should go into detail about a money multiplier with the new loans. Maybe I am just overthinking the question?
lcuddy89
CC BY-SA 3.0
2018-04-06T14:15:02.000Z
@marshalcraft Just wanted to make sure that OP didn’t leave anything out. Balance sheets are suppose to balance no matter how much any fractions are high or low, this is always true. No cases ever exist where this is not true.
ssn
CC BY-SA 3.0
2018-04-06T15:22:25.347Z
I'm not sure about balance sheets or accounting , however I think due to the odd nature of the question perhaps that is pertinent as asker does say balance sheet. Also yes more information can be provided, with out making more advanced assumptions about "money multipliers" it is quite clear loans can occur interest, as well as bonds are sometimes sold at discount or premium, not sure with open market operations how they are priced? But the only utility I can see in this question is describing how the fed can immediately effect money supplies through purchase of bonds.
marshal craft
CC BY-SA 3.0
2018-04-06T15:31:48.890Z
And even then the bank didn't get anything accept for yield if anything from selling it's bonds, and or interest it would receive on new loans. But the net supply of money is not credited from the new loans, only repositioned. So it is only bond price difference that really increases money supply. So outside of OMOs the only effective way of altering m0 is bond coupon.
marshal craft
CC BY-SA 3.0
2018-04-06T15:45:02.347Z
Also I don't see how the loans would effect the money multipliers, which appears to be 10. Unless the loans are deposited at that bank, increasing the deposit?
marshal craft
CC BY-SA 3.0
2018-04-07T22:05:13.627Z
I am not sure why the question gave an unbalanced balance sheet to begin with. I am wondering if the question was implying I should show how the balance sheet would balance once I invested the new money into the loans using a money multiplier? I have a similar problem after this one that I am working on, and the balance sheet given in that one was balanced to begin with.
lcuddy89
<macroeconomics>
Commercial bank balance sheet after Fed purchases $10 million in Treasury Bonds
lcuddy89
# Commercial bank balance sheet after Fed purchases $10 million in Treasury Bonds

(Asked by: username_0 on 2018-04-05)

Suppose the Fed conducts an open market purchase by buying $10 million in Treasury bonds from Acme Bank. Sketch out the balance sheet changes that will occur as Acme converts the bond sale proceeds to new loans. The initial Acme bank balance sheet contains the following information: Assets – reserves 30, bonds 50, and loans 50; Liabilities – deposits 300 and equity 30.

**Tags:** macroeconomics
> **Comments:**
> **username_1**: Your balance sheet is not balancing to begin with, so something is off already.  
> **username_2**: Ssn are saying that because the bank is running at very low fraction of its deposits?  
> **username_2**: And seems pretty simple, bonds are now 40, loans are 60 not accounting for interest in loans and yield on bonds. What was confusing you that you need to ask?  
> **username_0**: I wasn't sure if I should go into detail about a money multiplier with the new loans. Maybe I am just overthinking the question?  
> **username_1**: @marshalcraft Just wanted to make sure that OP didn’t leave anything out. Balance sheets are suppose to balance no matter how much any fractions are high or low, this is always true. No cases ever exist where this is not true.  
> **username_2**: I'm not sure about balance sheets or accounting , however I think due to the odd nature of the question perhaps that is pertinent as asker does say balance sheet. Also yes more information can be provided, with out making more advanced assumptions about "money multipliers" it is quite clear loans can occur interest, as well as bonds are sometimes sold at discount or premium, not sure with open market operations how they are priced? But the only utility I can see in this question is describing how the fed can immediately effect money supplies through purchase of bonds.  
> **username_2**: And even then the bank didn't get anything accept for yield if anything from selling it's bonds, and or interest it would receive on new loans. But the net supply of money is not credited from the new loans, only repositioned. So it is only bond price difference that really increases money supply. So outside of OMOs the only effective way of altering m0 is bond coupon.  
> **username_2**: Also I don't see how the loans would effect the money multipliers, which appears to be 10. Unless the loans are deposited at that bank, increasing the deposit?  
> **username_0**: I am not sure why the question gave an unbalanced balance sheet to begin with. I am wondering if the question was implying I should show how the balance sheet would balance once I invested the new money into the loans using a money multiplier? I have a similar problem after this one that I am working on, and the balance sheet given in that one was balanced to begin with.  

---

## 2 answers

### Answer by username_1 on 2018-04-06. Score: 1 | Accepted answer

The sale of the bonds (assets) will only affect the assets-side of the balance sheet.

If Acme bank did not lend out the money, your “bonds” would go 50-10 = 40. And your cash would go 0+10 = 10.

If they lend out the money, bonds still go to 40 and lending goes up by 10, so 50+10 = 60.

> **Comments:**
> **username_3**: That may be a little over simplified in that (a) cash is uncommon in today's banking and (b) initially at least a loan will increase both sides of a bank's balance sheet  
> **username_1**: @Henry you mean an oversimplified answer to this very detailed question? Further a) cash in relations to modern day banking is not the same physical cash and b) depends on how it is structured.  

---

### Answer by username_3 on 2018-04-07. Score: 0

Like @ssn, I would be happier if the balance sheet balanced, so let's suppose the original question said "the initial Acme bank balance sheet contains the following information: Assets – reserves 30, bonds 50, and loans 50; Liabilities – deposits 100 and equity 30", looking like:
 Assets               Liabilities

 reserves  30         deposits  100
 bonds     50         equity     30
 loans     50             
          ---                   ---
          130                   130

The impact of the sale of 10 worth of bonds to the Fed is simple as Acme Bank will increase its reserves at the Fed
 Assets               Liabilities

 reserves  40         deposits  100
 bonds     40         equity     30
 loans     50             
          ---                   ---
          130                   130

Perhaps Acme Bank then lends 10 to a customer, crediting that customer's deposit account
 Assets               Liabilities

 reserves  40         deposits  110
 bonds     40         equity     30
 loans     60             
          ---                   ---
          140                   140

The customer then spends the 10 on something (otherwise why borrow?), and presumably instructs Acme Bank to transfer 10 from the customer's deposit account to its supplier's bank, which Acme does by transferring some reserves at the Fed, making Acme's balance sheet look like 
 Assets               Liabilities

 reserves  30         deposits  100
 bonds     40         equity     30
 loans     60             
          ---                   ---
          130                   130

> **Comments:**
> **username_0**: Maybe there was a mistake in the problem. The above looks much better. I will try to clarify with someone from class.  

---

