A bank has the following simple balance sheet:
Assets Liabilities
Loans (L) Deposits (D)
Government Bond (G) Net Worth (K)
D = -800 + 20000*RD ; L = 1000 – 10000*RL; RG = 6%
Here, D is the amount of deposit funds supplied to the bank and RD is the rate of interest offered;
L is the dollar volume of loans demanded and RL is the interest rate charged on loans; RG is the
rate of return for government bonds.
(1) Determine the optimal D* and L* so the bank will generate maximum profit.
(2) Calculate the bank’s profit if K = 50.
