The gap between LIBOR and the expected Federal Reserve policy interest rate provides a key measure of which of the following:
A) the direction of movement of the Euro relative to the US dollar on the foreign exchange market.
B) the persistence and intensity of the liquidity crisis.
C) the expected length of a coming global recession.
D) the movement of the US stock market.

Question

Quizplus · Accepted Answer

The gap between LIBOR and the expected Federal Reserve policy interest rate is an indicator of the liquidity crisis. LIBOR is the rate at which banks borrow from each other, and it is influenced by the availability of liquidity in the financial system. The difference between LIBOR and the expected Federal Reserve policy interest rate reflects the degree to which banks are perceived to be under stress and the amount of liquidity in the market. A large gap between these two rates indicates a persistent and intense liquidity crisis.

The Gap Between LIBOR and the Expected Federal Reserve Policy