If there is a general shortage of liquidity in the money market then ?
Correct answer: E. The short-term interest rate at which the economy's commercial banks lend to and borrow from each other will rise and the central bank may be expected to increase the supply of liquidity to the banks.
- A. The banks will increase their lending
- B. The short-term interest rate at which the economy's commercial banks lend to and borrow from each other will fall and the central bank may be expected to reduce the supply of liquidity to the banks
- C. The short-term interest rate at which the economy's commercial banks lend to and borrow from each other will rise and the long-term interest rate may be expected to rise as a result
- D. the long-term interest rate in the economy will rise and the central bank will raise its interest rate in response
- E. The short-term interest rate at which the economy's commercial banks lend to and borrow from each other will rise and the central bank may be expected to increase the supply of liquidity to the banks.
Explanation
A shortage of liquidity makes banks compete for funds, pushing up the short-term interbank interest rate. The central bank would normally respond by supplying more liquidity, making option e the complete statement.
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