If a bank expects interest rates to fall,then it will want to:
A) achieve a positive ARBL.
B) achieve a negative ARBL.
C) lower the rate on its loans before it lowers the rates on its deposits.
D) increase the rates on its loans before it lowers the rates on its deposits.

Question

Quizplus · Accepted Answer

If interest rates are expected to fall, banks may want to increase the rates on their loans before lowering the rates on their deposits. This is because lower interest rates on deposits may cause depositors to withdraw their funds in search of higher yields elsewhere, potentially leading to a liquidity problem for the bank. In contrast, higher rates on loans may attract more borrowers, which can help offset the potential decrease in interest income from deposits. Additionally, raising loan rates before deposit rates can improve the bank's net interest margin, which is a measure of profitability.

If a Bank Expects Interest Rates to Fall,then It Will