Question

Macroeconomic question need help!!!

Consider a bank that has assets of 100, capital of 20, and short-term credit of 80. Among the bank's assets are securitized assets whose value depends on the price of houses. These assets have a value of 50. Assets Securitized assets Liabilities Short-term credit S 80 $50 $ 50 Other assets Net Worth Capital $20 Suppose that as a result of a housing price decline, the value of the bank's securitized assets falls by an uncertain amount, so that these assets are now worth somewhere between 25 and 45. Call the securitized assets "troubled assets." The value of the other assets remains at 50. As a result of the uncertainty about the value of the bank's assets, lenders are reluctant to provide any short-term credit to the bank. Given the uncertainity about the value of the bank's assets, the value of the bank's capital will be between 0 and $ .

Answer 1

Solution: -$5 when things are bad to $15 when things are good

Working: The corresponding balance sheets are computed below.

Assets	Amount	Liabilities	Amount
Troubled assets	$25	Short-term credit	$80
Other assets	$50	Capital	-5
Total assets	$75	Total Liabilities and Equity	$75

Assets	Amount	Liabilities	Amount
Troubled assets	$45	Short-term credit	$80
Other assets	$50	Capital	$15
Total assets	$95	Total Liabilities and Equity	$95