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[Solution] Suppose Bank One offers a risk-free interest rate of 5.5% on both savings and loans, and Bank Enn offers a risk free interest rate of 6% on both

Question: Suppose Bank One offers a risk-free interest rate of 5.5% on both savings and loans, and Bank Enn offers a risk free interest rate of 6% on both savings and loans.

  1. What arbitrage opportunity is available?
  2. Which bank would experience a surge in the demand for loans?  Which bank would receive a surge in deposits?
  3. What would you expect to happen to the interest rate the two banks are offering?

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