economy questions 3

only question 4 5 and 6 in the file

4) a) Suppose interest rates in the economy rise from 1% to 6%, what will happen to Typical Bank’s profit? Show a calculation. b) Calculate the average duration of assets and liabilities for Typical Bank. c) Suppose interest rates rise in the economy from 1% to 6%, what will happen to Typical Bank’s capital relative to assets? Show a calculation. d) Using the original balance sheet information, what is the leverage ratio for Typical Bank? Briefly explain whether they comply with regulations for the leverage ratio or not. e) Using the original balance sheet information, if Typical Bank had an ROA of 2%, what is the banks’s ROE?

5) For each statement, state whether you believe the statement is true or false. Provide a brief explanation of your reasoning. a) Depositors face an adverse selection problem when choosing where to bank. c) The principal-agent problem means shareholders face an adverse selection problem in the stock market d) Financial Services Modernization Act allowed a bank to sell insurance if it wanted to do so.

6) For each of the following you only need to provide a one or two-word response (choose one of the underlined phrases for each statement). a) Because certificates of deposit are less liquid than checking deposits, certificates of deposit are paid more or less interest? b) Higher bank capital decreases the likelihood of bankruptcy and higher bank capital increases or decreases the return on equity for a given return on assets? c) When financial system regulators conduct an examination of bank operations, this is an example of microprudential or macroprudential regulation? d) When we talk about a bank needing to improve its liquidity management, we usually mean the bank the needs to focus on its excess or required reserves level?


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