Costner National, a commercial bank, obtains short-term deposits and makes long-term fixed-rate loans. It should be adversely affected when the Fed

Question

Quizplus · Accepted Answer

When the Federal Reserve uses a tight-money policy, it typically increases interest rates to reduce inflation. This scenario can adversely affect Costner National because it relies on short-term deposits to fund long-term fixed-rate loans. As short-term interest rates rise, the cost of obtaining deposits increases, but the bank cannot adjust the interest rates on its existing long-term loans. This squeezes the bank's profit margins.

Costner National, a Commercial Bank, Obtains Short-Term Deposits and Makes