If the gap on a bank's balance sheet is -$10,000 and interest rates rise by 4%, then bank profits
A) rise by $40,000.
B) rise by $400.
C) fall by $40,000.
D) fall by $400.

Question

Quizplus · Accepted Answer

A negative gap on a bank's balance sheet indicates that liabilities are more sensitive to interest rate changes than assets. If interest rates rise by 4%, the bank will pay more on its liabilities than it earns on its assets, decreasing profits by 4% of $10,000, which is $400.

If the Gap on a Bank's Balance Sheet Is -$10,000