Suppose the Bank of Canada's Announced Target for the Overnight

question 47

Multiple Choice

Suppose the Bank of Canada's announced target for the overnight interest rate is 2.75%.Why should we expect commercial banks to borrow and lend overnight funds at a rate very close to this target?

• A)Because the Bank of Canada Act requires that commercial banks borrow from each other at a rate no higher than 0.25% above the target rate.
• B)Because commercial banks know that they can borrow from the Bank of Canada at 3.00%,and lend to the Bank at 2.50% so the rate they charge each other will stay within that range.
• C)Because the Bank of Canada chooses its target rate based on the anticipated borrowing needs of the commercial banks.
• D)Because it is not legal for commercial banks to transact between each other at any rate outside of the Bank of Canada's target range.
• E)Because commercial banks face regulatory obstacles if they borrow from each other at any rate outside of the Bank of Canada's target range.

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Definitions:

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