Question

Suppose the assets of the Silver Lode Bank are \(100,000 higher than on the previous day and its net worth is up to \)20,000. By how much and in what direction must its liabilities have changed from the day before?

Short answer

Due to the increase in assets and net worth, the liabilities have increased to $80,000.

Step-by-step solution

Money multiplier and the required ratio

The balance sheet, to represent the true financial position, must satisfy the following equation:

Assets = Liabilities + Net worth

Therefore, a change in assets must be equal to a change in liabilities + a change in net worth.$$\begin{gathered} △A=△L+△NW \\ △L=△A-20000 \\ △L=100000-20000 \\ △L=80000 \end{gathered}$$

The change in liabilities is equal to $80,000. The equation needs to be balanced; thus, liabilities will increase if assets and net worth have increased. Therefore, liabilities have increased to $80,000 due to change in assets and liabilities.