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Question 2 (25 marks total) Below is a representative bank's T-account. Answer the questions below. Assets Reserves Loans Other assets Liabilities and Owners' Equity Deposits
Question 2 (25 marks total) Below is a representative bank's T-account. Answer the questions below. Assets Reserves Loans Other assets Liabilities and Owners' Equity Deposits $3.2 million $30 million Debt $6.8 million Capital (owners' equity) $32 million $6 million $X million a) What is the reserve ratio? What is the bank's capital amount ($X million)? What is the bank's leverage ratio? (4 marks) b) The loans consist of $1 million in mortgage loans for 30 households. One household failed to repay, resulting in the bank owning a house valued at $1.1 million (an increase in value from the time of the loan origination). How can this change be expressed in the T-account, considering that real estate is categorized as 'other assets'? (4 marks) c) Now, with nine more households failing to repay their loans, the bank holds houses, and all the houses' prices have dropped to $0.7 million each (a large decline in asset prices). What is the impact of this change on the T-account, and how does it affect the bank's capital? (4 marks) d) Customers with uninsured deposits started withdrawing funds for fear of not being able to get their deposits back. The bank previously holds no excess reserve. If the withdrawal is $3 million, what action should the bank take to maintain the original reserve ratio? What would happen in the housing market? (4 marks) e) If the withdrawal is $4 million, what consequences would the bank face? More than thirty percent of banks in the economy have this issue. What would happen to the overall economy? (4 marks) f) To mitigate the effects, the central bank plans to lower the federal funds rate through open market operations. The demand for federal funds is represented as FD =100 - 50r, and the supply as Fs =-50+50r, where r is the federal funds rate (%) and F is the federal funds amount (in millions of dollars). What is the minimum amount of government bonds needed to buy or sell in order to reduce the federal funds rate to 1%? Explain. (5 marks) I
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