Assignment # 4
Chapters 14 & 15
1. You are the lender of last resort and an institution approaches you for a loan. You assess
that the institution has $800 million in assets, mostly in long-term loans, and $600
million in liabilities. It is experiencing unusually high withdrawal rates on its demand
deposits and is requesting a loan to tide it over. Would you grant the loan? (Ch 14)
From the information provided, we can notice that assets are greater than liabilities ($800>
$600). Therefore, I would grant the loan.
2. You are a bank examiner and have concerns that the bank you are examining may have a
solvency problem. On examining the bank’s assets, you notice that the loan sizes of a
significant portion of a bank’s loans are increasing in relatively small increments each
month. What do you think might be going on and what should you do about it? (Ch 14)
As we can see, there may be NPL problem. Borrowers have not been able to make
payments of principals or interests for a long time. Consequently, the sizes of the loans
tend to increase significantly. As the examiner, I should be able to review all the loans and
decide on whether or not I should cancel them or simply repair them.
3. Which do you think would be more harmful to the economy – an inflation rate that
averages 5 percent a year that has a high standard deviation or an inflation rate of 7
percent that has a standard deviation close to zero? (Ch 15)