Let the balance sheet of the bank be described by L + R + T = D + E, where L is the stock of loans, R is the reserves, T is the stock of liquid assets, D is the deposits and E is the equity capital. Let the required return on bank capital be given by ρ. Let the reserve–deposit ratio be given by k and the capital–loan ratio be given by b. If the demand for loans is given by the equation r_L = α−βL and the rates of interest on loans, deposits and liquid assets are given by r_L, r_D and r_T , respectively, ignoring costs, derive the profit-maximising expression for the loan rate. What is the effect of an increase in the required return on capital? What is the effect of an increase in the capital–loan ratio?