Write your answeers in the space provided below. Refer to the information provided below to answer Question 1. Bank South Pacific is in equilibrium with an initial deposit of K 400 million, liquid assets of K 100 million and loans and advances of k 300 million. QUESTION 1 A. Draw an initial balance sheet to represent the above information (3 marks) B. Calculate the liquid asset ratio (LGS) using the data provided in the balance sheet. (1 mark) \( \qquad \) C. Calculate the bank credit multiplier. (1 mark) \( \qquad \) D. Calculate the additional credit created with the new deposit of K 60 million: (2 marks) E. Draw a final balance sheet showing additional credit created (ACC). (3 marks)

To solve the problem, let's break it down step by step. ### A. Initial Balance Sheet The initial balance sheet for Bank South Pacific can be represented as follows: | **Assets** | **Liabilities** | |--------------------------------|--------------------------------| | Liquid Assets: K 100 million | Deposits: K 400 million | | Loans and Advances: K 300 million | | | **Total Assets: K 400 million** | **Total Liabilities: K 400 million** | ### B. Calculate the Liquid Asset Ratio (LGS) The Liquid Asset Ratio (LGS) is calculated using the formula: \[ \text{LGS} = \frac{\text{Liquid Assets}}{\text{Total Deposits}} \] Substituting the values: \[ \text{LGS} = \frac{100 \text{ million}}{400 \text{ million}} = 0.25 \text{ or } 25\% \] ### C. Calculate the Bank Credit Multiplier The Bank Credit Multiplier (M) can be calculated using the formula: \[ M = \frac{1}{\text{Reserve Ratio}} \] Where the Reserve Ratio is the ratio of liquid assets to total deposits: \[ \text{Reserve Ratio} = \frac{\text{Liquid Assets}}{\text{Total Deposits}} = 0.25 \] Thus, the Bank Credit Multiplier is: \[ M = \frac{1}{0.25} = 4 \] ### D. Calculate the Additional Credit Created with the New Deposit of K 60 Million The additional credit created can be calculated using the Bank Credit Multiplier: \[ \text{Additional Credit} = \text{New Deposit} \times \text{Credit Multiplier} \] Substituting the values: \[ \text{Additional Credit} = 60 \text{ million} \times 4 = 240 \text{ million} \] ### E. Final Balance Sheet Showing Additional Credit Created (ACC) After the new deposit of K 60 million and the additional credit created of K 240 million, the final balance sheet will be: | **Assets** | **Liabilities** | |--------------------------------|--------------------------------| | Liquid Assets: K 100 million + K 15 million (25% of K 60 million) = K 115 million | Deposits: K 400 million + K 60 million = K 460 million | | Loans and Advances: K 300 million + K 240 million = K 540 million | | | **Total Assets: K 655 million** | **Total Liabilities: K 655 million** | ### Summary of Answers A. Initial Balance Sheet: - Total Assets: K 400 million - Total Liabilities: K 400 million B. Liquid Asset Ratio (LGS): 25% C. Bank Credit Multiplier: 4 D. Additional Credit Created: K 240 million E. Final Balance Sheet: - Total Assets: K 655 million - Total Liabilities: K 655 million