Question

All else the same, if a bank's liabilities are more sensitive to interest rate fluctuations than are its assets, then ________ in interest rates will ________ bank profits. Question 10 options: A) an increase; reduce B) an increase; increase C) a decline; not affect D) a decline; reduce

Answer 1

A) an increase; reduce

Step-by-step explanation:

All else the same ,if a bank liabilities are more sensitive to interest rate fluctuations than are its assets, then an increase in interest rates will reduce bank profits.

A bank is said to be sensitive towards to interest rates means that the bank revalue its liabilities on the basis of the change in the interest rates. Thus if the interest rates increases it means the liabilities of the bank has increased on which the bank is liable to pay higher interest which will automatically reduce the bank profits as the interest payable by the bank is an expense for the bank.