Happy Bank Happy Bank starts with $200 in bank capital. It then takes in $800 in deposits. It keeps 12.5 percent (1/8th) of deposits in reserve. It uses the rest of its assets to make bank loans. a. Show the balance sheet of Happy Bank. Use a "T" account. b. What is Happy Bank's leverage ratio? Show how you calculate it. c. Suppose that 10 percent of the borrowers from Happy Bank default and these bank loans become worthless. Show the bank's new balance sheet. Use a "T" account. d. By what percentage do the bank's total assets decline? By what percentage does the bank's capital decline? Which change is larger? Why?

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Chapter16: The Monetary System
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What's the answer for letter C and D 

Happy Bank
Happy Bank starts with $200 in bank capital. It then takes in $800 in
deposits. It keeps 12.5 percent (1/8th) of deposits in reserve. It uses the
rest of its assets to make bank loans.
a. Show the balance sheet of Happy Bank.
Use a "T" account.
b. What is Happy Bank's leverage ratio?
Show how you calculate it.
c. Suppose that 10 percent of the borrowers from Happy Bank default and these
bank loans become worthless. Show the bank's new balance sheet.
Use a
"T" account.
d. By what percentage do the bank's total assets decline?
By what percentage does the bank's capital decline?
Which change is larger?
Why?
Transcribed Image Text:Happy Bank Happy Bank starts with $200 in bank capital. It then takes in $800 in deposits. It keeps 12.5 percent (1/8th) of deposits in reserve. It uses the rest of its assets to make bank loans. a. Show the balance sheet of Happy Bank. Use a "T" account. b. What is Happy Bank's leverage ratio? Show how you calculate it. c. Suppose that 10 percent of the borrowers from Happy Bank default and these bank loans become worthless. Show the bank's new balance sheet. Use a "T" account. d. By what percentage do the bank's total assets decline? By what percentage does the bank's capital decline? Which change is larger? Why?
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