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Happy Bank starts with $200 in bank capital. It then accepts $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. b. What is Happy Bank’s leverage ratio? 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. 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?

BuyFind

Brief Principles of Macroeconomics...

8th Edition
N. Gregory Mankiw
Publisher: Cengage Learning
ISBN: 9781337091985
BuyFind

Brief Principles of Macroeconomics...

8th Edition
N. Gregory Mankiw
Publisher: Cengage Learning
ISBN: 9781337091985

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Chapter
Section
Chapter 11, Problem 6PA
Textbook Problem

Happy Bank starts with $200 in bank capital. It then accepts $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.

b. What is Happy Bank’s leverage ratio?

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.

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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