The change is bigger in financial institution capital as compared to adjust in bank's total assets because thefinancial institution largely utilizing other people's money as the deposits to make loans.




You are watching: Happy bank starts with $200 in bank capital

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The Data of Macroeconomics

The Real Economy in the Long Run

Money and also Prices in the Long Run


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Video Transcript

question 6. Happy paying stars through $200 in bank funding. It supposed, other than $100 in deposits in the caves, 18 off deposits in reserves So you and it uses the rest of his assets to make bank long. So first question A. We have to display the bounce sheet off Hepple Bank. So for Happy Bank, this is going to be somepoint prefer thiss, and also we know that the deposit is 800 while it claims that 18 off the deposit is booked, which means that the reserve is reservists $100 best. This is 1/8 off 800 right? And then the funding in the financial institution resources. All right, cap right here is $200 so the balance sheet has to make the left hand also side in the appropriate hand also side balance so that some of the best hand also side is 1000. Which suggests that the Long's on the lap inside is going to be 900 so that both off these 2 columns include approximately 1000 Okay, question plea. What isthe Happy financial institutions leverage ratio. So leverage. Racial best l r. He's the number ofthe essence. So some of the left elect inside is 1000 divided by its capital, Jews on 200. So the leverage, racial off happy financial institution is why, right? Question? See, mean that 10% off the borrowers from happy massive default in these bangles come to be worthless. Which implies that 10% out of this 900 default till currently belong is going to be on Lee. 810 U. S. Dollars. Okay, so display the bank's brand-new balance sheet. So points our deposit, our self on the right hand also side, we cannot change the number ofthe deposit bereason this is people who saved their money in the bank. If they come, Teo, withattract their money. We have to have actually this 800. And so what we have the right to readjust here is the bank funding below. So on the lappeak, inside the summits 900 achieve. So we have to make this appropriate insight. Some additionally 110 so maintained resources becomes 110 so diminished by 90. Okay, then D, but what percentage do the bank's complete essence decline? By what percenters does the banksresources decline which alters the larger so we can check out that the complete assets goes from a hunt. 1000 two. Now we just have actually a DH means only have actually 910. So the readjust is so the alters 90 out of 1000 which is 9% 9%. So 9% of transforming pass it while in funding it provided to be 200 and also currently it isthe 110. So in a changing racial is really huge. Since this 90 out of out of 200 which is 45 45% so which one is larger, the resources transforms larger because we can check out so we can observe that the numbers is just the difference of the numbers. It's simply the leverage racial bereason for a 9% adjust in assets and also times this level Trey shal we recognize that this leverage racial mace, the readjust in capital extremely huge. Five times the readjust off asset. This is the power of this average racial bereason here Knight Times five is 45