Assume the following balance sheet for a commercial bank: Assets Reserves Demand Deposits Time Deposits (CDs) Savings Deposits Capital The reserve requirement is 10% of demand deposits. Government Securities Mortgages Loans 50 100 400 Liabilities 450 500 250 170 80 Assets Liabilities Reserves 50 Demand Deposits 500 Government Securities 100 Time Deposits (CDs) 250 Mortgages 400 Savings Deposits 170 Loans 450 Capital 80 The reserve requirement is 10% of demand deposits. a. Suppose the bank earns 0% on its reserves, 2% on its holdings of government securities, 4% on its mortgages and 5% on its loans. What is the bank's return on equity? b. What is the bank's leverage ratio? c. Suppose the bank wants to decrease the amount of its capital. Explain one way that it could do this d. Suppose the value of the mortgages falls to 350 because some borrowers default on their payments. Show the effect that this will have on the balance sheet. e. Suppose the value of the bank's assets decline by x percent. What is the maximum value of x that the bank can sustain and still remain solvent? f. Which liability category is usually the lowest cost of funding for banks? g. Which liability includes borrowing from money market mutual funds?

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