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Explanation:
Using the sources and uses of funds method:
Sources of funds = Increases in deposits (checkable deposits + time and savings deposits) Uses of funds = Increases in loans (commercial loans + consumer loans)
April Analysis:
Checkable Deposits change: 80 - 90 = -$10 (decrease)
Time and Savings Deposits change: 475 - 490 = -$15 (decrease)
Total Sources = -$10 + (-$15) = -$25 (actually a use of funds)
Commercial Loans change: 710 - 700 = +$10 (increase)
Consumer Loans change: 175 - 200 = -$25 (decrease)
Total Uses = +$10 + (-$25) = -$15 (actually a source of funds)
Wait, let me recalculate properly:
Sources of funds = Increases in deposits:
Uses of funds = Increases in loans:
Liquidity Gap = Sources - Uses = 0 - 10 = -$10
This matches option D: "During April, sources of $15 partially offset uses of $25 to imply a negative liquidity gap of ten because $15 - $25 = -$10."
Verification of other options:
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First City Bell Bank has forecast its checkable deposits, time and saving deposits, and commercial and household loans over the next six months; aka, semester.
| Month | Checkable Deposits | Time and Savings Deposits | Commercial Loans | Consumer loans |
|---|---|---|---|---|
| January | 120 | 400 | 500 | 140 |
| February | 110 | 490 | 640 | 220 |
| March | 90 | 490 | 700 | 200 |
| April | 80 | 475 | 710 | 175 |
| May | 95 | 475 | 700 | 150 |
| June | 75 | 480 | 720 | 210 |
If we employ the sources and uses of funds method to estimate the bank's liquidity needs over the semester, which of the following statements is TRUE?
A
During February, sources of liquidity equal zero.
B
During the first quarter (Jan, Feb, March), Acme expects a positive liquidity gap.
C
Over the cumulative six-month semester (Jan through June), Acme expects a positive liquidity gap.
D
During April, sources of $15 partially offset uses of $25 to imply a negative liquidity gap of ten because $15 - $25 = -$10.