Econ Q

Which one of the following statements regarding monetary policy in the global financial markets is least accurate? A) Decisions by consumers and businesses are based largely on long-term interest rates, which are beyond the control of the central bank. B) Interest rates that commercial banks charge on longer-term loans depend primarily on expectations about future funding costs and inflation expectations. C) Expectations of private banks about the future direction of monetary policy and the central bank’s commitment to price stability are key factors in determining interest rates. D) As business financing by issuing bonds in the global financial markets becomes more prevalent, central banks are increasingly able to influence economic activity directly by adjusting systemic liquidity.

yuck. I’m going to go with B. A commercial bank would be more concerned with prepayment risk and credit quality of the borrower, right?

guessing on B. - Dinesh S

I’m going with C.

I’ll go with C as well.

I would like to ring in with A

C is for me.


Your answer: D was correct! Central banks influence economic activity directly by increasing or decreasing systemic liquidity in the commercial banking system. As more businesses seek financing by issuing bonds in the financial markets instead of financing through commercial bank loans, the ability of a central bank to influence economic activity directly decreases.

Wow people… We suck! (except lola)

That was not an easy question.

lola, thanks for helping all of us with your questions! I guess one way to interpret that answer is that it is going to be more difficult for the central bank to move markets as volume increases.

Yeah, the premise is that central governments have a hard time influencing ‘long term’ rates as they can be at 30 years (mortgages) or longer and are market based. The Fed can change short-term rates in an instant, but it is up to the market to use the short term rates and apply them to their customers. Look at the liquidity nightmare we’ve been through in the last couple of months! Good question for drawing the distinction between the Fed and market control of the yield curve.

Bodymore Wrote: ------------------------------------------------------- > Wow people… We suck! (except lola) LOL