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Assess the following statements S1 and S2. Are they both true, both false or is only one true? Justify your answer.

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Question 4:

  1. Assess the following statements S1 and S2. Are they both true, both false or is only one true? Justify your answer.

S1.       The bank lending rate will decrease the riskier loans are perceived to be.

S2.       Given S1, the more risk that banks can tolerate, the lower the bank lending rate will be.

(10 marks)

  1. Use the 3-equation model to show the impact of banks suddenly realizing that the loans they have made are riskier. Discuss what happens to both the policy rate and the lending rate.

(15 marks)

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