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3. (20 points) The following is a simplified balance sheet for Local Horse and Trader Bank (LHTB). Show all work for potential partial credit. Assume that in addition to our reserve requirement, we assume a bank must have capital ratio of 5%, where capital is measured against only loan value. Assets Liabilities + Net Worth Required Reserves ? Demand Deposits $400,000 Excess Reserves $5,000 Loans $355,000 Net Worth $20,000 (a) Calculate the required reserve ratio and current capital ratio. (b) How much could the bank lend out today and still meet its reserve requirement today? (c) Assume the bank makes the loans from the previous part of the question, and the loans are redeposited at the same bank. Write out the new balance sheet. (d) Based on the capital requirement, what would be the value for the maximum loans at LTHB. Assume the bank makes these new loans, and any new loans are redeposited at the bank. Write out this new balance sheet. (e) Which institution is the bank's 'lender of last resort' dealing with liquidity issues, and which institution deals with bank solvency issues? For which reason do banks hold 'capital'? Liquidity or solvency why? 3. (20 points) The following is a simplified balance sheet for Local Horse and Trader Bank (LHTB). Show all work for potential partial credit. Assume that in addition to our reserve requirement, we assume a bank must have capital ratio of 5%, where capital is measured against only loan value. Assets Liabilities + Net Worth Required Reserves ? Demand Deposits $400,000 Excess Reserves $5,000 Loans $355,000 Net Worth $20,000 (a) Calculate the required reserve ratio and current capital ratio. (b) How much could the bank lend out today and still meet its reserve requirement today? (c) Assume the bank makes the loans from the previous part of the question, and the loans are redeposited at the same bank. Write out the new balance sheet. (d) Based on the capital requirement, what would be the value for the maximum loans at LTHB. Assume the bank makes these new loans, and any new loans are redeposited at the bank. Write out this new balance sheet. (e) Which institution is the bank's 'lender of last resort' dealing with liquidity issues, and which institution deals with bank solvency issues? For which reason do banks hold 'capital'? Liquidity or solvency why

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