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Speculative and Precautionary Demands

Statement: Sh...

Question

Statement: Should there be only one rate of interest for term deposits of varying durations in banks?
Arguments:
I. No. People will refrain from keeping money for longer duration resulting into reduction of liquidity level of banks.
II. Yes. This will be much simple for the common people and they may be encouraged to keep more money in banks.

A

Only argument I is strong

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B

Only argument II is strong

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C

Either I or II is strong

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D

Neither I nor II is strong

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E

Both I and II are strong

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Solution

The correct option is D Only argument I is strong
Should there be only one rate of interest for term deposits of varying duration in banks?
Having this kind of policy adoption by banks will not encourage people to deposit their money for long duration and hence banks will have to suffer. In such a case people will find alternatives for their investment.
Thus, Argument I seems valid and II is vague.
Hence, Option A is correct.

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