Question

Consider a bank with the following balance sheet: Liabilities Assets $525,000,000 Deposits $50,000,000 Reserves $475,000,000 Loans...

  1. Consider a bank with the following balance sheet:

Liabilities

Assets

$525,000,000 Deposits

$50,000,000 Reserves

$475,000,000 Loans

This bank can liquidate loans at 67 cents on the dollar. Meaning they can sell a $1 loan for $0.67.

  1. (2 points) Compute the reserve ratio for this bank.



  2. (4 points) Suppose depositors arrived and withdrew $40,000,000. Show the bank’s new balance sheet. Would the bank need to liquidate any loans?




  3. (4 points) Suppose depositors arrived and withdrew $75,000,000. Show the bank’s new balance sheet. Would the bank need to liquidate any loans?




d. (2 points) How can bank runs cause a recession?

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