Macro Economic Study Guideline
.) A bank has reserves of $200 million, loans of $400 million, and mortgage-backed securities of $400 million. The liabilities of the bank
leverage ratio is 20. Assume that for every $1 million available for it to lend, the bank can either put $1 million in reserves or can generate $5 million in loans. Growth in housing prices stops and housing prices tumble. Mortgage backed securities decrease in value by 1/3.
a.) Assume that the Fed lowers the Reserve Requirement from 0.2 to 0.15. Could this solve the problem? Why might it not solve the problem? (4 points)
b.) Assume the Fed offers low interest rate loans that increases cash at the ba Can this solve the problem discussed in situation b? In what situation might it not? (4 points)
c.) Assume that the Treasury department buys the mortgage-backed securities for $400 million. How does this solution compare to the two above? (4 points)
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Published June 18, 2021By Categorized as Assignment Questions
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