Assume an FI Has $50 000 in Assets and $45

question 68

Multiple Choice

Assume an FI has $50 000 in assets and $45 000 in liabilities.Which of the following statements is true if interest rates on both assets and liabilities increase simultaneously?

• A)As the interest rate for both assets and liabilities increase the value of the FI's net worth will remain constant.
• B)As the interest rate for both assets and liabilities increase the value of the FI's assets and liabilities will both decrease.
• C)As the interest rate for both assets and liabilities increase the value of the FI's assets and liabilities will both increase.
• D)As the interest rate for both assets and liabilities increase the value of the FI's assets and liabilities will both increase; however, as the FI has more assets than liabilities, the increase in the value of the FI's assets will be greater than the increase in the value of its liabilities.

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Definitions:

Budget Line

A graphical representation of all possible combinations of two goods that can be purchased with a given budget and prices.

Substitution Effect

The substitution effect describes the change in consumption patterns due to a change in relative prices, leading consumers to substitute a product for a cheaper alternative.

Income Effect

The adjustment in demand for goods and services triggered by a change in consumers' discretionary income.

Income Increases

Situations where an individual's or household's earnings rise, potentially affecting their spending, saving, and investment behaviors.