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# 经济代写|宏观经济学代考Macroeconomics代写|ECON5002 Lending is capital constrained

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## 经济代写|宏观经济学代考Macroeconomics代写|Lending is capital constrained

We have already detailed that lending is constrained by whether the loans that banks intend to make will be profitable. Additionally, a bank’s capital will curtail lending. Looking at a balance sheet, capital is the difference between total assets and liabilities. That is simple enough, but what does it mean? Think of a bank’s capital as a type of cushion. If the bank was liquidated and all liabilities were satisfied, the capital is the amount of assets that would remain. Since it represents the amount of the bank’s assets that would be there after liabilities were paid, it is the cushion available to protect it in the case of a decline in the value of the bank’s assets.

But how does the capital relate to lending? Remember the Tier I, Tier II, and Tier III ratios issued by the BIS? Basically, a measure of a bank’s capital relative to its outstanding loans, the capital ratio provides a risk-weighted measure that determines when a bank needs to slow down lending. Leverage ratios measure the bank’s capital against its un-weighted total assets.

Clearly, banks make profit when they make loans to customers. Since they do not have to have deposits to lend and they can find reserves to meet prescribed requirements, banks could loan as long as there was demand for borrowing. With demand being a function of the market, a healthy economy and competitive lending rate environment could allow a bank to easily find itself with an abundance of customer demand. As long as the spread between interest rates on new loans sufficiently exceeds the rate that a bank would pay to borrow any reserves it might need, the bank stands to profit. Since banks’ profits increase as their lending activities increase, it makes sense that they would lend every dollar possible.

## 经济代写|宏观经济学代考Macroeconomics代写|Benchmarks and targets

We have all heard that too much money creates inflation. The well-known saying, “There are too many dollars chasing too few goods,” which implies that inflation is a function of the money supply, is simple, but relatively correct. The word inflation generally has a negative connotation, even inciting fear for some, especially if they lived through the 1970 s. At the same time, we are led to believe that some inflation is good. It can be confusing. So how are we to know what the right amount of inflation is? Historically, it has turned out to be true that $2 \%-3 \%$ inflation is a good thing, but more than that is unhealthy. In order to achieve this $2 \%-3 \%$ ‘sweet spot, central banks take the appropriate action to drive the economy in the correct direction.

We often hear that the central bank ‘sets interest rates,’ but that is not really the best description of what happens. In the United States, the Fed sets the Federal funds rate, which economists on the Federal Open Market Committee decide upon based on the environment in which the economy is operating at the current time. Commonly referred to as the Fed funds rate, this is the interest rate that lending institutions charge to borrow reserves from each other. Further, it is the benchmark rate upon which other lending is based, directly impacting other short-term interest rates as well as the prime rate, which is used by banks to build rates for longer-term borrowing.

# 宏观经济学代写

## 经济代写|宏观经济学代考Macroeconomics代写|Benchmarks and targets

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