Question

1. Due to the Coronavirus Pandemic, the Federal Reserve lowered the short-term interest rates. We are also expected to have a huge reduction in our aggregate output temporarily. Describe how these two factors will affect the profits of commercial banks and the various risks that they have. Explain your answer clearly.

Answer 1

Due ti the coronaviirus pandemic, the federak reserve lowered the short term interest,the fed manipulates the rate as a tool for monetary policy to achive goals of price stability and economic growth.Interest rate are reducing because central banks wants to revive the economy out of the slowdown and increase consumer spending. so interest rates will reduce And also leading rate have been reduced by the government so that individuals can survive in this Pandemic situation.

      The fed lowers interest rates to stimulate economic growth. lower financing costs can encourage borrowing and investing. The rate costs lead to lowering of the adjustable rate mortagage payments.Those who have saving earn less interest if the fed cuts rates This boostes consumption because return on saving are reduced.

Given that post pandemic , It is expected that there would be a huge fall in aggregate output, thus the profitability and revenue of many businesses will suffer in the forceable future.This is adversely affects their ability to repay loans or honor the news ones or provide credibale colleteral.Thus, although the fed aimed to boosting the credit flow,gives the circumstances, the risks of lending more is also high, higer risks and NPA possibility would impact the liquidity and credibility of commercial banks adversely.

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