Chapter 34, Problem 5TPS

Sub part (a):

To determine

Whether bank of DMV is solvent or insolvent, liquid or illiquid.

Answer to Problem 5TPS

Liquid but insolvent.

Explanation of Solution

The bank is said to be liquid when the short-term assets of the bank are higher than the short-term liabilities of the bank. Here in the case of the bank of DMV, the short-term assets are of $10 million, whereas the short-term liabilities are of $6 million. Therefore, the short-term assets are greater than the short-term liabilities, which means that the bank is liquid.

The bank is said to be solvent when the total assets of the bank are higher than the total liabilities. Here, in the case of DMV, the total assets are of $40 million, whereas the total liabilities are of $50 million. It shows that the total assets are less than the total liabilities, and the bank is insolvent. Thus, the bank should be shut down immediately due to its insolvency.

Economics Concept Introduction

Concept introduction:

Money: Money is a widely used medium of exchange.

Liquidity: Liquidity is the easiness of selling and buying the asset in the market without affecting the value of the asset.

Sub part (b):

To determine

Whether bank of Esc is solvent or insolvent, liquid or illiquid.

Answer to Problem 5TPS

Illiquid but solvent.

Explanation of Solution

The bank is said to be liquid when the short-term assets of the bank are higher than the short-term liabilities of the bank. Here, in the case of the bank of Esc, the short-term assets are of $6 million, whereas the short-term liabilities are of $10 million. Therefore, the short-term assets are lower than the short-term liabilities, which means that the bank is illiquid.

The bank is said to be solvent when the total assets of the bank are higher than the total liabilities. Here, in the case of Esc, the total assets are of $50 million, whereas the total liabilities are of $40 million. It shows that the total assets are higher than the total liabilities, and the bank is solvent. Thus, the bank probably needs short-term loans from other banks or Fed to make it liquid.

Economics Concept Introduction

Concept introduction:

Money: Money is a widely used medium of exchange.

Liquidity: Liquidity is the easiness of selling and buying the asset in the market without affecting the value of the asset.

Sub part (c):

To determine

Whether bank of PRE is solvent or insolvent, liquid or illiquid.

Answer to Problem 5TPS

Liquid and solvent.

Explanation of Solution

The bank Pre has a short-term asset of $12 million, which is greater than its short-term liability of $10 million. Similarly, while looking at the total assets of the bank, it has $50 million, which is higher than the total liabilities of $40 billion.

Since the bank has higher short-term as well as total assets than the liabilities, the bank of Pre is both liquid as well as solvent.

Economics Concept Introduction

Concept introduction:

Money: Money is a widely used medium of exchange.

Liquidity: Liquidity is the easiness of selling and buying the asset in the market without affecting the value of the asset.

Sub part (d):

To determine

Whether bank of Cam is solvent or insolvent, liquid or illiquid.

Answer to Problem 5TPS

Illiquid and insolvent.

Explanation of Solution

The bank of Cam has a short-term asset of $8 million, which is lower than its short-term liability of $10 million. Similarly, while looking at the total assets of the bank, it has only $30 million, which is also lower than the total liabilities of $40 billion.

Since the bank has lower short-term as well as total assets than the liabilities, the bank of Cam is both illiquid as well as insolvent.

Economics Concept Introduction

Concept introduction:

Money: Money is a widely used medium of exchange.

Liquidity: Liquidity is the easiness of selling and buying the asset in the market without affecting the value of the asset.

Sub part (e):

To determine

Whether bank of Mar is solvent or insolvent, liquid or illiquid.

Answer to Problem 5TPS

Liquid and solvent.

Explanation of Solution

The bank of Mar has a short-term asset of $120 million, which is greater than its short-term liability of $100 million. Similarly, while looking at the total assets of the bank, it has $500 million, which is higher than the total liabilities of $400 billion.

Since the bank has higher short-term as well as total assets than the liabilities, the bank of Mar is both liquid as well as solvent.

Economics Concept Introduction

Concept introduction:

Money: Money is a widely used medium of exchange.

Liquidity: Liquidity is the easiness of selling and buying the asset in the market without affecting the value of the asset.

Subpart (f):

To determine

Which of the loans signal as the bad signs about the financial condition of borrower.

Answer to Problem 5TPS

Options 'b', 'c', and 'd' are bad signs.

Explanation of Solution

There are many sources for taking loans for various purposes. The main one is the commercial banks. There are many others such as the borrowing from the relatives, friends, illegal money markets etc. Each defines the financial condition of the borrower.

Option (a):

When the student takes loan from the federal student loan program, it charges lower interest rate on the student. The student has to repay the loan with ease and affordably, which means that the loan taking is not much troublesome.

Option (b):

The payday loan store is a loan source that provides the loan to the needy people but charges very higher rates of interest on them. Thus, those who take loan from the payday loan store are in desperate need for mone,y and it shows the very poor financial condition of the borrower.

Option (c):

The borrowing of money with the credit card and paying the daily expenses is also a bad sign. This is considered a bad sign because the credit card also charges higher interest rate on the consumer. Also when the consumer is in need of credit card money to pay daily expenses, it is very troublesome to repay the credit card loan in the future.

Option (d):

When the friend borrows money from her parents, it does not show up as a bad sign. It will become a bad sign when the parents are also in the debt trap and unable to fetch the money. Under normal situations, it is not a bad sign.

Option (e):

The illegal loan sharks are the ones who charge the maximum possible interest rate on the loans provided by them. Those who take loans from them are those who are in urgent need of money. Helping them out will be difficult because they cannot easily repay. Thus, it turns out to be a negative sign.

Subpart (g):

To determine

Who gets to vote and who becomes the chairperson of Federal Reserve Board.

Explanation of Solution

The House of Representatives have got no vote in determining the chairperson of the Federal Reserve Board. It is out of the discretion of the House of Representatives. The chairperson of the Federal Reserve Board is elected, and the power to vote for it is for the Senate. The Senate has the authority to confirm the President's appointments and not the House of Representatives.

Economics Concept Introduction

Concept introduction:

House of representatives: The house of representatives is one part of the federal government's legislative branch. It is established through the Article 1 of the constitution. The other branch is the Senate. They together form the US congress.