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Part $1$

In$$ mid$-2021,$ an article in the Wall Street Journal noted that the European Central Bank had been paying a negative interest rate on the reserve accounts of banks. In$$ addition, interest rates on many government$$ bonds, such as$$ Germany's $10-$year bond were$$ negative, and some European banks had begun to pay negative interest rates on their$$ customers' deposits. The article quoted one German depositor as$$ saying, $"$I$$ wouldn't mind receiving nothing for my$$ deposit, but being asked to pay is just too$$ much."

$$Source: Patricia$$ Kowsmann, "Banks in Germany Tell Customers to Take Deposits$$ Elsewhere," Wall Street

Journal$,$

March$1,2021.$

Why was the European Central Bank paying a negative interest rate on$$ banks' reserves?

A$.$

The prices of some$$ long$-$term ECB bonds had risen to such high levels that the yields on the bonds were actually negative.

B$.$

$$Long$-$term interest rates were so low after rounds of central bank contractionary policy that bond yields were pushed negative.

C$.$

The prices of some$$ long$-$term ECB bonds had fallen to such low levels that the yields on the bonds were actually negative.

D$.$

$$Long$-$term interest rates were so high after rounds of central bank expansionary policy that bond yields were pushed negative.

Part $2$

Why are investors willing to buy German government bonds with a negative interest$$ rate?

A$.$

They believed that there was no chance the German government would default on its$$ bonds, while the default risk on corporate bonds and bank deposits was high because interest rates were so high.

B$.$

They believed that there was no chance the German government would default on its$$ bonds, while the default risk on corporate bonds and bank deposits was high because interest rates were so low.

C$.$

Concerns over the stability of the European Central Bank meant that German bonds were more attractive to investors.

D$.$

Other countries were defaulting on their$$ bonds, while Germany was not.

Part $3$

What actions would you expect depositors in Germany to take in response to German banks paying negative interest rates on bank$$ deposits?

A$.$

Depositors would pull their money out of the banks and probably begin using more cash for transactions.

B$.$

Depositors would put more money into the banks and use more credit for transactions since interest rates were so low.

C$.$

Depositors would put more money into the banks in the hopes of driving the interest rate up on bank deposits.

D$.$

They would wait for the German government to enact policies to force banks to pay positive interest rates.