Principles of Economics, 7th Edition (MindTap Course List)
Principles of Economics, 7th Edition (MindTap Course List)
7th Edition
ISBN: 9781285165875
Author: N. Gregory Mankiw
Publisher: Cengage Learning
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Chapter 29, Problem 4QCMC
To determine

The leverage ratio and the asset of the bank.

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A bank has a capital of $200 and a leverage ratio of 5. If the value of the bank's assets declines by 10 percent, then its capital will be reduced to a. $100. b.$150. c. $180. d. $185.
Assets Liabilities and Equity Reserves                          $5,000 Demand deposits         $20,000 Business loans                 $10,000   Student loans                   $8,000   Government securities     $2,000 Equity (Net worth)         $5,000 Total assets                      $25,000 Total liabilities and equity  $25,000 The following is a balance sheet for Smith Bank.  Assume a 10% reserve requirement. A.  Calculate a 10% reserve requirement B.  Calculate the maximum amount of additional loans that Smith Bank can make without selling its holdings of government securities. C. Assuming that Smith Bank and other banks now lend out all excess reserves, calculate the maximum possible change in the following:      i.  Demand deposits throughout the banking system      ii.  Total reserves throughout the banking system D.  Suppose that the country's central bank purchases $1,000 of Smith Bank's holdings of government securities as part of its open market operations.  Do…
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