Question 2: (Modern Bank Runs) Consider a simple bank that has assets of 100, capital of...

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Question 2: (Modern Bank Runs) Consider a simple bank that has assets of 100, capital of 20, and short-term credits (e.g., one-month term deposits) of 80. Short-term credit must be repaid or rolled over (borrowed again) when it comes due. a) Set up this bank's balance sheet. b) Suppose the perceived value of the bank's assets falls. If lenders are nervous about the solvency of the bank, will they be willing to continue to provide short-term credit to the bank at low interest rates? c) Assuming that the bank cannot raise additional capital, how can it raise the funds necessary to repay its debt coming due? If many banks are in this position at the same time (and if banks hold similar kinds of assets), what will likely happen to the value of the assets of these banks? How will this affect the willingness of lenders to provide short-term credit? Question 2: (Modern Bank Runs) Consider a simple bank that has assets of 100, capital of 20, and short-term credits (e.g., one-month term deposits) of 80. Short-term credit must be repaid or rolled over (borrowed again) when it comes due. a) Set up this bank's balance sheet. b) Suppose the perceived value of the bank's assets falls. If lenders are nervous about the solvency of the bank, will they be willing to continue to provide short-term credit to the bank at low interest rates? c) Assuming that the bank cannot raise additional capital, how can it raise the funds necessary to repay its debt coming due? If many banks are in this position at the same time (and if banks hold similar kinds of assets), what will likely happen to the value of the assets of these banks? How will this affect the willingness of lenders to provide short-term credit?

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Banks are the important macroeconomic indicators of a country Explanation a Banks balance ... View the full answer