What will the Federal Reserve's balance sheet show after a $2 billion open market purchase of U.S. Treasury securities?

The Federal Reserve's balance sheet reflects the assets it holds, which include U.S. Treasury securities, and its liabilities, which primarily consist of bank reserves. When the Federal Reserve conducts an open market purchase of U.S. Treasury securities, it buys these securities from banks or financial institutions, effectively increasing its assets.

As a result of this transaction, the Federal Reserve increases its holdings of U.S. Treasury securities by the amount purchased, which in this scenario is $2 billion. Therefore, there will be an increase in the assets category of the balance sheet by $2 billion.

Simultaneously, to pay for these Treasury securities, the Federal Reserve credits the reserves of the banks from which it purchased the securities. This transaction increases the reserves, which are a liability on the Federal Reserve's balance sheet. Consequently, the liabilities also increase by $2 billion as banks now have more reserves available.

Thus, the correct answer illustrates both the increase in the asset category due to the Treasury securities purchased and the corresponding increase in the liability category due to the rise in bank reserves. This shows that the balance sheet grows in size as both assets and liabilities increase by the same amount, maintaining the fundamental balance of assets and liabilities in accounting terms.