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In the Marco-Julia model, the bank's profit directly translates into increased net worth. For example, starting with an initial equity of 10 units of grain, the bank earns a 2-unit profit after Julia repays her loan and Marco's deposit is settled. This profit is added to the initial equity, increasing the bank's net worth—and thus the owner's equity—to 12 units in the second period.

Example of Bank's Net Worth Increase from Profit in the Marco-Julia Model

Based on the following scenario, calculate the bank's net worth at the end of the year and briefly explain your reasoning.

Calculating a Bank's Change in Net Worth

A commercial bank starts a period with an owner's equity of $50,000. Over the period, it engages in lending activities that generate a total profit of $4,000 after all loans are repaid. Assuming no other changes, what is the bank's owner's equity at the end of the period?

A commercial bank's net worth increases at the exact moment it issues a new loan to a customer.

A commercial bank makes a profitable loan. Describe how the bank's net worth is affected at two distinct points in time: 1) the moment the loan is created and issued to the borrower, and 2) the moment the loan is fully repaid with interest. Explain the reasoning for the change (or lack of change) at each point.

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