Question

Use a simple balance sheet to show the effect on a bank of the Fed conducting open market purchases.

Answer 1

Fed's conduct of open market purchase will increase money supply, therefore for an individual commercial bank, the immediate effect (before extending additional loans) will be an increase in both reserves and checkable deposits.

For example, let us consider the following simple balance sheet (reserves are not decomposed into required and excess reserves).

ASSETS	$	LIABILITIES & NET WORTH	$
Reserves	500	Checkable deposits	800
Loans	300	Net worth	200
Other assets	200
TOTAL	1,000	TOTAL	1,000

Now assume Fed purchases bonds in open market worth $200. Reserves & Checkable deposits each increases by $200 (before any new loan is made). New balance sheet becomes as follows.

ASSETS	$	LIABILITIES & NET WORTH	$
Reserves	700	Checkable deposits	1,000
Loans	300	Net worth	200
Other assets	200
TOTAL	1,200	TOTAL	1,200