Question

27) Banks may borrow from or lend to another bank in the Federal Funds market. A loan of excess reserves from one bank to another bank is recorded as an) for the borrowing bank and a(n) for the lending bank. A) asset; asset B) asset; liability C) liability; liability D) liability; asset 28) An expectation may fail to be rational if A) relevant information was not available at the time the forecast is made. B) relevant information is available but ignored at the time the forecast is made. C) information changes after the forecast is made. D) information was available to insiders only.

Answer 1

27. Option D.

• The bank's usually do various transactions of borrowing or lending to another banks in the federal funds market when they have excess or are in short of money reserves.
• When a bank loans an excess reserve from another bank, then it is recorded as a liability for the borrowing bank as the bank has to pay back the loan after a particular point of time with interest.
• But for the lending bank, this loan is considered as an asset as the bank earns back the loaned amount with interest.

28. Option B.

• An expectation may fail to be rational if the relevant information is available but ignored at the time the forecast is made.
• In rational expectations theory, when relevant information is available, the forecast errors are also available at the same time.
• This errors are rather very unpredictable in nature due to which the expectations fails to be rational as they try to ignore those errors at the time of forecast.