Use the Following Balance Sheet (Values in Thousands of Dollars)

question 69

Multiple Choice

Use the following balance sheet (values in thousands of dollars) to answer the question. $$\begin{array} { | l | r | l | r | } \hline { \text { Assets } } & & { \text { Liabilities and equity } } & \\\hline \text { Cash required reserves } & 21 & \text { Demand deposits } & 550 \\\hline \text { Short-term securities } & 369 & \text { Interbank borrowed funds } & 151 \\\hline \text { Loans } & 400 & \text { Equity } & 89 \\\hline \text { Total } & 790 & \text { Total } & 790 \\\hline\end{array}$$ If the bank experiences a $50 000 sudden liquidity drain caused by a loan commitment drawdown, what will be the impact on the balance sheet if stored liquidity management techniques are used?

• A)a reduction in cash of $21,000 and an increase in demand deposits of $29,000
• B)a reduction in securities and/or current loans totalling $50,000
• C)a reduction in cash of $21,000 and a decrease in securities holdings of $29,000
• D)a decrease in equity of $50,000

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Definitions:

Current Account Deficit

is a measurement of a country's trade where the value of the goods and services it imports exceeds the value of the products it exports.

Foreign Indebtedness

The total amount of debt a country owes to foreign creditors.

Fixed Exchange Rates

A currency system where the value of a currency is set at a predetermined rate relative to other currencies, instead of fluctuating in the open market.

Exchange Controls

Restrictions that a government may impose over the quantity of foreign currency demand by its citizens and firms and over the rate of exchange as a way to limit the nation’s quantity of outpayments relative to its quantity of inpayments (in order to eliminate a payments deficit).