Question

The following is the title of a july 15, 2015 Nationsl Post article " bank of canada cuts benchmark interest rate of 0.5% slashes economic outlook"

what is the prime lending rate's relationship to the "benchmark interest rate" mentioned in the article?
a The prime lending generally rises as the benchmark interest rate rises
b the prime lending rate generally falls as the benchmark interest rate rises
c. the prime lending rate is always equal to the benchmark interest rate
d. the prime lending rate is equal to the benchmark interest rate when real GDP is equal to potential GDP

Answer 1

The prime lending rate typically rises and falls with the benchmark interest rate, and is usually set higher by a specific margin set by banks. Hence, the prime lending rate generally rises as the benchmark interest rate rises.

Step-by-step explanation:

The relationship between the prime lending rate and the "benchmark interest rate" mentioned in the article is that the prime lending rate generally rises and falls with changes in the benchmark interest rate. The prime rate is typically higher than the benchmark rate, often by a set margin, to ensure banks make a profit on loans. For instance, if the central bank's benchmark rate is at 1%, the prime rate might be set around 4%, including a common margin of three percentage points.

Therefore, the correct answer to the student's question is (a): The prime lending rate generally rises as the benchmark interest rate rises. As the Bank of Canada cuts the benchmark interest rate, this typically influences the prime lending rate to decrease correspondingly, making loans to consumers and businesses cheaper, which can stimulate economic activity.