The Average Interest Earned on the Loans Is 6 Percent

question 107

Multiple Choice

$\begin{array}{l}\begin{array}{l}\text { Assets} & \text { Liabilities and Equity}\\\text { Cash Required Reserves}&\$ 2 \text { million Deposits } \\\text { Loans}&\$ 10 \text { million Longterm Debt } \\&\text { Equity } \\\text { Total}&\$ 12 \text { million Total }\end{array}\begin{array}{l}\\\$ 8 \text { million } \\\$ 2 \text { million } \\\$ 2 \text { million } \\\$ 12 \text { million }\end{array}\end{array}$ The average interest earned on the loans is 6 percent and the average cost of deposits is 5 percent.Rising interest rates are expected to reduce the deposits by $3 million.Borrowing more debt will cost the bank 5.5 percent in the short term.
What will be the cost of using a strategy of reducing its asset base to meet the expected decline in deposits? Assume that the bank intends to keep $2 million in cash as a liquidity precaution.

• A)$10,000.
• B)$15,000.
• C)$30,000.
• D)$40,000.

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Definitions:

Conditioned Stimulus

A previously neutral stimulus that, after becoming associated with an unconditioned stimulus, triggers a conditioned response.

Impending Occurrence

An anticipated event that is about to happen or likely to occur in the near future.

Unconditioned Stimulus

In the context of classical conditioning, a stimulus that effortlessly and automatically provokes a response with no prior instruction.

Generalization

The process by which the brain applies learned responses to similar stimuli beyond the original situation.