Consider a recently founded economy, Del Griffith Park, whose politicians are debating economic policies to implement. They are first considering whether or not to found a central bank and issue their own currency.

Right now, they use US dollars for all their transactions and thus are subject to monetary policy dictated by the Federal Reserve. Banks in this economy like to hold reserves when interest rates are low, and dislike holding reserves when interest rates are high, and can borrow and lend with US banks at the US Federal Funds Rate.

Question 1-There is one bank in the economy, the Del Griffith Banking and Shower Curtain Rings, with the following balance sheet.

Assets

Reserves: $60B

Corporate Bonds: $200B

Mortgage-Backed Securities: $500B

Liabilities

Repos: $100B

Deposits: $600B

Bank Capital: $60B

When the economy enters the downturn, depositors worry that they will be unable to withdraw their money. All of the bank's depositors show up and demand the bank return their deposits. If the bank is unable to cover all of their deposits with their cash on hand, they can sell their Mortgage Backed Securities at 75% value and their Corporate Bonds at 90% of their value. Show what happens to this bank if bank managers try to limit any losses to the smallest amount possible.