A3 Homework: The Financial Crisis and the Great RecessionWest Bank Balance SheetAssetsLlabilities and Net WorthReserves$0Checking deposits$0Loans outstanding $200,000 Stockholders' equity $200,000Total$200,000Total$200,000is a levered bank, whileIs an unlevered bank.Assume that both banks offer an annual rate of 4% on checking deposits and charge an annual rate of B% on loans.For East Bank, the annual interest cost on deposits is 5, which represents a rate of return ofand the annual return on loans is(Hint: Round to 1 decimal place.) on stockholders' equity.Hence, East Bank earns anet profit ofFor West Bank, the annual interest cost on deposits is snet profit of Sand the annual return on loans is 5(Hint Round to 1 decimal place.) on stockholders' equity.Hence, West Bank earns a1. which represents a rate of return ofSuppose that the value of loans in both banks declines by 10%. The amount of loans outstanding for East Bank decreases from $450,000 towhich represents a loss of(Hint: Round to 1 decimal place.) of stockholders' equity. The amount of loans outstandingfor West Bank decreases from $200,000 to s,which represents a loss of(Hint: Round to I decimal place.) of stockholdersequityTherefore,provides a higher rate of return to its investors, andexposes its investors to greater risk in the event ofa decline in the value of loans. The following tables show the balance sheets of two banksi East Bank and West Bank.East Bank Balance SheetAssetsLiabilities and Net WorthReserves$150,000Checking deposits$500,000Loans outstanding$450,000Stockholders' equity$100,000Total$600,000Total$600,000West Bank Balance SheetAssetsLlabilities and Net WorthReserves$0Checking depositsLoans outstanding $200,000 Stockholders' equity$200,000Total$200,000Total$200,000is a levered bank, whileis an unlevered bank.Assume that both banks offer an annual rate of 4% on checking deposits and charge an annual rate of 8% on loansFor East Bank, the annual interest cost on deposits is 5net profit of Sand the annual return on loans isSHence, East Bank earns aI, which represents a rate of return of% (Hint: Round to 1 decimal place.) on stockholders' equityFor West Bank, the annual interest cost on deposits is Sand the annual return on loans is 5Hence, West Bank earns anet profit of swhich represents a rate of return ofr(Hint: Round to 1 decimal place.) on stockholders' equity.Suppose that the value of loans in both bank nes by 10%. The amount of loans outstanding for East Bank decreases from $450,000 towhich represents a loss ofBound to 1 decimal place.) of stockholders' equity. The amount of gan dingfor West Bank decreases from $200,000 toswhich represte.) of stockholders

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is a levered bank, while Is an unlevered bank. Assume that both banks offer an annual rate of 4% on checking deposits and charge an annual rate of 8% on loans. For East Bank, the annual interest cost on deposits is 5 and the annual return on loans is E (Hint: Round to 1 decimal place.) on stockholders' equity. Hence, East Bank earns a net profit of 5 which represents a rate of return of

is a levered bank, while Is an unlevered bank. Assume that both banks offer an annual rate of 4% on checking deposits and charge an annual rate of 8% on loans. For East Bank, the annual interest cost on deposits is 5 and the annual return on loans is E (Hint: Round to 1 decimal place.) on stockholders' equity. Hence, East Bank earns a net profit of 5 which represents a rate of return of

Principles of Macroeconomics (MindTap Course List)

7th Edition

ISBN:9781285165912

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter16: The Monetary System

Section: Chapter Questions

Problem 5PA

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