Question

In general, banks would prefer to acquire funds quickly by ________ rather than ________.

A) reducing loans; selling securities
B) reducing loans; borrowing from the Fed
C) borrowing from the Fed; reducing loans
D) "calling in" loans; selling securities

Answer 1

Banks generally prefer to quickly acquire funds by selling securities rather than reducing loans, as selling securities is quicker and maintains customer relationships.

Step-by-step explanation:

In general, banks would prefer to acquire funds quickly by selling securities rather than reducing loans. Banks are able to gather funding without immediately affecting their customer base by selling securities, which is typically a quicker and more flexible option compared to calling in or reducing loans. Reducing loans can be a slower process and may adversely affect the bank's relationship with its borrowers. Selling securities is also more favorable as compared to borrowing from the Federal Reserve because the Federal Reserve typically charges a higher discount rate as compared to the federal funds rate, discouraging banks from utilizing this as a primary option.