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# Area Y and Area O

Suppose the population of Area Y is relatively young while that of Area O is relatively old, but everything else about the two areas is equal.

A: Would interest rates likely be the same or different in the two areas? Please explain.

B: Would a trend toward nationwide branching by banks, savings & loans, and the development of nationwide diversified financial corporations affect your answer to Part A?

If a "typical" firm reports \$20 million of retained earnings on its balance sheet, could its directors declare a \$20 million cash dividend without any qualms whatsoever. Please explain supported by some relevant examples.

#### Solution Preview

Suppose the population of Area Y is relatively young while that of Area O is relatively old, but everything else about the two areas is equal.

A: Would interest rates likely be the same or different in the two areas? Please explain.
The interest rates depend on the demand for and supply of loans. It is expected that demand for loan in area Y will be higher and this will increase the interest rates in area Y than in area O.
The reason for this difference is that in area Y there will be a greater demand for loans. Young people require loans to finance their education, purchase homes and set up new businesses. They have lesser savings to draw on and so the demand for loans in area Y is higher. On the other hand, older people have ...

#### Solution Summary

This explanation provides you a comprehensive argument relating to Area Y and Area O

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