Suppose a bank in the island republic of Banana Land, known as Banana Bank has $20...

 

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Suppose a bank in the island republic of Banana Land, known as Banana Bank has $20 million in reserves, $80 million in loans, $10 million in securities, $100 million in deposits and $10 million in bank capital. The Central Bank of Banana land has a reserve requirement of 15%. Due to an international study that showed bananas cause inflammation in human beings, Banana land's only export- bananas- collapsed leading to a recession. Many Banana land residents withdrew money from the banks, including $20 million withdrawn suddenly from Banana Bank. (2-3 paragraphs, No diagram required) a) Assuming Banana Land has identical institutions and financial markets as the US, what are the four key choices for Banana Bank to eliminate a shortfall of reserves if there is one, in general? (5 points) b) What is the level of reserves after the deposit withdrawal and what quantity of reserves need to be sourced to ensure Banana Bank is in compliance with the reserve requirements at the central bank? (5 points) c) Explain why one of the choices in general, outlined in part (a) cannot be used on its own to cover the shortfall, due to the "Banana-shock" deposit withdrawal event. (5 points) Suppose a bank in the island republic of Banana Land, known as Banana Bank has $20 million in reserves, $80 million in loans, $10 million in securities, $100 million in deposits and $10 million in bank capital. The Central Bank of Banana land has a reserve requirement of 15%. Due to an international study that showed bananas cause inflammation in human beings, Banana land's only export- bananas- collapsed leading to a recession. Many Banana land residents withdrew money from the banks, including $20 million withdrawn suddenly from Banana Bank. (2-3 paragraphs, No diagram required) a) Assuming Banana Land has identical institutions and financial markets as the US, what are the four key choices for Banana Bank to eliminate a shortfall of reserves if there is one, in general? (5 points) b) What is the level of reserves after the deposit withdrawal and what quantity of reserves need to be sourced to ensure Banana Bank is in compliance with the reserve requirements at the central bank? (5 points) c) Explain why one of the choices in general, outlined in part (a) cannot be used on its own to cover the shortfall, due to the "Banana-shock" deposit withdrawal event. (5 points)

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a The four key choices for Banana Bank to eliminate a shortfall of reserves if there is one in general assuming Banana Land has identical institutions ... View the full answer