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Suppose there is one depositor who earns an income of $100 in each period.She spends $50 for consumption and the remainder goes to her savings account.Assume that a bank doesn't do anything with this money except safeguards it.The bank charges $5 for safeguarding fee.
-If there are two merchants who wish to borrow $100 at t = 0, and the bank charges 18% loan rate, what is the bank's aggregate profit from lending?
A)$66
B)$42
C)$36
D)$18
E)$0

Question

Use the following information for questions 
Suppose there is one depositor who earns an income of $100 in each period.She spends $50 for consumption and the remainder goes to her savings account.Assume that a bank doesn't do anything with this money except safeguards it.The bank charges $5 for safeguarding fee.
-If there are two merchants who wish to borrow $100 at t = 0, and the bank charges 18% loan rate, what is the bank's aggregate profit from lending?
A)$66
B)$42
C)$36
D)$18
E)$0

Quizplus · Accepted Answer

The depositor saves $50 each period, and the bank charges $5 safeguarding fee, so the bank receives $5 from each period. Thus, the bank receives $55 in total from each period. At t=0, the two merchants borrow $100 each so the bank receives a total of $200. The bank charges an 18% loan rate, so the merchants have to pay back $118 each to the bank at the end of the period. Thus, the bank's total profit from lending is:
Total received from lending ($236) - Total returned from lending ($200) = $36. Therefore, the correct answer is C.

Use the Following Information for Questions