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Consider a bank that has assets of 150, capital of 50 and demand deposits of 100. Remember that deposits are liabilities of a bank. (i)Set

Consider a bank that has assets of 150, capital of 50 and demand deposits of 100. Remember that deposits are liabilities of a bank.

(i)Set up the bank’s balance sheet. What is the leverage and capital ratio?

(ii) Now suppose that the value of a bank assets fall by 50. What is the new leverage and capital ratio?

(ii) Why might this worry an economist?

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