Commercial Bank Response to Policy Rate Changes
Imagine a country's central bank increases its main policy interest rate by 0.5%. A large commercial bank in that country responds by immediately increasing the interest rate it offers on new savings accounts, but it does not change the interest rate on its existing 5-year fixed-rate home loans. Based on the typical functioning of lending and borrowing markets, explain the reasoning behind this commercial bank's differing actions for savings accounts versus existing fixed-rate loans.
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Introduction to Macroeconomics Course
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