Question

4. Bank Leverage (Based on Mankiw Ch. 4 #9). Jimmy Paul Miller starts his own bank, called JPM. As owner, Jimmy puts in $2,000 of his own money. JPM then borrows $4,000 in a long-term loan from Jimmy's uncle, accepts $14,000 in demand deposits from his neighbors, buys $7,000 of U.S. Treasury bonds, lends $10,000 to local businesses, and keeps the remainder of the bank's assets as reserves at the Fed. a.) Show JPM's balance sheet. What is JPM's leverage ratio? b.) An economic downturn causes 20 percent of the local businesses to declare bankruptcy and default on their loans. Show JPM's new balance sheet. By what percentage does the value of JPM's assets fall? By what percentage does JPM's capital fall? As a result of the downturn, does it look like JPM will be able to stay in operation? c.) Let's say that prior to the downturn, the government had concerns about the ability of businesses to pay back their loans and put in place a 40% capital requirement. That is, banks had to hold capital equal to 40% of whatever money they loaned out. Assuming JPM wanted to maintain its volume of lending, show the bank's balance sheet prior to the downturn with the capital requirement. You can assume Jimmy has the means to make further investment in the bank. Also, calculate JPM's new leverage ratio. Is this ratio lower or higher than before? Does this imply JPM is more or less likely to go bankrupt? d.) Show JPM's new balance sheet after the downturn (which still causes 20 percent of businesses to default on their loans) with the capital requirement imposed. By what percentage does the value of JPM's assets fall? By what percentage does JPM's capital fall? As a result of the capital requirement, is JPM more likely to be able to remain in operation after the downturn? e.) Say Jimmy is unwilling to make any further investment in JPM. How does JPM meet its capital requirement in this case? Show JPM's new balance sheet prior to the downturn. What impact would you expect this to have on the money supply? Why?

Answer 1

Given that @ the demand for labour is detea mired by the amount of labor that a profit mai müzirg fioim wants to live at a given real wage. The Profit mazaimizing condition is that the form fiore labour until marginal product of labor equals the real wage MPL = /p] =s The Margiral Product of labor is found by differenciating the production funchon with respect to laboor MPL = dx/dh. =10 (£): W ov Lok 10-34] 3 @ from 10 (E)S W We get w=10 P LW = 10000 and y=5 (27000) (1000)*3 t = 15000

© New wages are so that the new equal labor to wall demand is equal to - bo 27000 (0.3x1133 751:3 273 output y 25 (27000)** (751.3)63 - 1a396.1 Total labor income LW = 751.3x1) : . -8a64.4 ① The redistribute output from the aua workers who became involuntarily unemplied to the 757 workers, who get paid More than before. => tetal benefits to the workery also falls from "1000otu 8a54.4" so congress has failed in its goal of helping the working class. @ this problem focus on the analysis of minimum wage laws which have the following effects they raise the wage for some worlcoy while downwards sloping demand reduce total num of jobs. as the labor demand way less elastic doss of employment may be smaller and the change in worked income might be positive