Forward commitment by the Fed has which of the following impacts? Forward commit
ID: 1096989 • Letter: F
Question
Forward commitment by the Fed has which of the following impacts?
Forward commitment creates moral hazard in lending, as banks know that the Fed will continue to pump reserves into the system.
Forward commitment encourages lending because banks do not fear that the Fed will suddenly reverse the policy.
Forward commitment eliminates all flexibility in monetary policy.
Forward commitment encourages excessive lending as banks try to take control of as many reserves as possible before the policy is exhausted.
Explanation / Answer
The correct answer is:
Forward commitment encourages lending because banks do not fear that the Fed will suddenly reverse the policy.
Explanation - When fed provides forward commitment there is less undcertainty which encourages bank lending.