When the Federal Reserve purchases a U.S. Treasury bond for $1 million, what is the result on its balance sheet?

When the Federal Reserve purchases a U.S. Treasury bond for $1 million, both its assets and liabilities increase as a result of this transaction. The bond purchased is classified as an asset; thus, the Fed's asset side of the balance sheet increases by $1 million.

Simultaneously, in order to facilitate this purchase, the Federal Reserve credits the reserve accounts of commercial banks, which results in a corresponding increase on the liability side of its balance sheet. This is because these reserve accounts represent part of the Fed's liabilities; when reserves are created by the Fed in exchange for the bond, the total liabilities also rise by $1 million.

This action reflects the basic principles of double-entry accounting, where every financial transaction impacts both sides of the balance sheet equally. Therefore, the purchase of the bond results in an increase in both assets and liabilities, confirming that the correct answer is the one indicating this dual increase.