1. The following is a balance sheet of a commercial bank (in millions of dollars): Assets Liabilities...

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1. The following is a balance sheet of a commercial bank (in millions of dollars):

Assets Liabilities and Equity Cash $ 5 Insured deposits $30 Loans 40 Uninsured deposits 10 Equity 5 Total assets $45 Total liabilities and equity $45 The bank experiences a run on its deposits after it declares that it will write off $10 million of its loans as a result of nonpayment. The bank has the option of meeting the withdrawals by first drawing down its cash and then selling off its loans. A fire sale of loans in one day can be accomplished at a 10 percent discount. They can be sold at a 5 percent discount if they are sold in two days. The full market value will be obtained if they are sold after two days.

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