Question

Use the information presented in Midwestern Mutual Bank's balance sheet to answer the following questions.

Bank’s Balance Sheet

Assets Liabilities and Owners' Equity

Reserves $200 Deposits $2,000

Loans $1,000 Debt $150

Securities $800 Capital (owners' equity) -$150

Suppose the owners of the bank borrow $100 to supplement their existing reserves. This would increase the reserves account and (increase/decrease) the (capital/debt/deposits/loans/reserves) account.

This would also bring the leverage ratio from its initial value of (-14.00/-13.33/-11.23/-10.60) to a new value of (-14.00/-13.33/-11.23/-10.60).

Which of the following do bankers take into account when determining how to allocate their assets? Check all that apply.
a. The total value of liabilities
b. The reserve requirement
c. The size of the monetary base

Answer 1

Answer:

Answer for task 1: Increase

Answer for task 2: debt

Answer for task 3: -13.33

Answer for task 4: -14.00

Answer for task 5: reserve requirement

Explanation:

Task 1:

In the given question, the owner has borrowed $100 supplement to their existing reserves. Since the owner has borrowed, the value of debt would increase.

Task 2:

Leverage ratio before borrowing:

Leverage ratio = $\frac{Total assets}{Capital}$

Leverage ratio = $\frac{200 + 800+1000}{-150}$

Leverage ratio = -13.33

The leverage ratio before borrowing is - 13.33

Task 3:

Leverage ratio after borrowing:

Leverage ratio = $\frac{Total assets}{Capital}$

Leverage ratio = $\frac{2000 + 100}{-150}$

Leverage ratio = -14.00

The leverage ratio after borrowing is - 14.00

Task 4:

This would also bring the leverage ratio from its initial value of -13.33 to a new value of -14.00.

Task 5:

Which of the following do bankers take into account when determining how to allocate their assets? Check all that apply.

The option is "b"

When determining how to allocate their assets bankers take into account the reserve requirement.