Consider an economy with $10 billion in base money and a multiplier of 3. The mo
ID: 1224101 • Letter: C
Question
Consider an economy with $10 billion in base money and a multiplier of 3. The money supply is currently $10 billion × 3 = $30 billion. Now let’s say that the amount of money increases by 50 percent, to $15 billion. How must the multiplier change for the money supply to remain unaffected by this change in base money?
Instructions: Round your answer to two decimal places.
The multiplier must change to ___
A single bank is considering two options: First, it can make a $200000 mortgage loan for a customer with a 10 percent probability of default, or, second, it can buy a $200000 security representing a bundle of 100 mortgage loans, which break down as shown in the table below.
You can calculate the weighted risk for each firm category by multiplying the percentage of loans represented (for example, the first tier includes 25 loans, which is 25/100 = 25% of the total) times the probability of default on loans of that category.
a. Calculate the weighted risk for each type of loan, then add together the weighted risks to come up with an overall expected default risk for this financial investment.
Instructions: Round your answers to three decimal places.
b. Adding together the weighted risks, the expected default risk for the security is __ percent.
c. If the bank is willing to take on only projects for which the default risk is 6 percent or less, it should choose (Click to select)the single mortgage loanthe bundle of mortgages.
of loans Probability of
default (%) Weighted
risk 25 3 __% 25 12 __% 15 1.5 __% 35 5 __%
Explanation / Answer
it should be change