Solution to Stage Five

1: Effective return net of reserve requirement

= interbank rate × (1 – reserve requirement)

For instance, for the one-year interbank rate of 3% and a reserve requirement of 10%, the effective rate is 2.7% (3% × (1 – 10%)).

Net interest margin on deposits

Net interest margin on deposits of 100 = (2.7% – 1.7%) × 100 = 1

Net interest margin on deposits of 200 = (3.15% – 2.15%) × 200 = 2

Total net interest margin on deposits = 1 + 2 = 3

Net interest margin on loans

Net interest margin on loans of 200 = (6% – 4%) × 200 = 4

Net interest margin on loans of 300 = (8% – 5%) × 300 = 9

Total net interest margin on loans = 4 + 9 = ...

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