Happy Bank starts with $200 in bank capital. It then accepts $800 in deposits. It keeps 12.5

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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 that 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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Principles Of Macroeconomics

ISBN: 9780357133491

9th Edition

Authors: N. Gregory Mankiw

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Question Posted: Sep 28, 2024 08:01 AM

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Happy Bank starts with $200 in bank capital. It then accepts $800 in deposits. It keeps 12.5

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Principles Of Macroeconomics

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