Happy Bank starts with $200 in bank capital. It then takes in $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 Banks leverage ratio?

c) Suppose that 10 percent of the borrowers from Happy Bank default and these bank loans become worthless. Show the banks new balance sheet.

d) By what percentage do the banks total assets decline? By what percentage does the banks capital decline? Which change is larger? Why?