Local businesses to declare bankruptcy and default on loans

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Reference no: EM131871599

James Madison Jr. starts his own bank, called JMJ. As owner, James puts in $2,000 of his own money. JMJ then borrows $4,000 in a long-term loan from his uncle, accepts $14,000 in demand deposits from his neighbors, buys $7,000 of U.S. Treasury bonds, lends $10,000 to local businesses to finance new investments, and keeps the remainder of the bank’s assets as reserves at the Fed.

A) An economic downturn causes 5 percent of the local businesses to declare bankruptcy and default on their loans. Show JMJ’s new balance sheet. By what percentage does the value of JMJ’s assets fall? Is JMJ meeting it's capital and/or reserve requirements? Explain briefly.

B) Suppose now that the bank would like to exactly meet it's reserve requirements today by "sweeping" their deposits into a savings account. Write out their new balance sheet.

Reference no: EM131871599

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