1. If Bank A intends to maximize the profit, will it reduce its lending rates? Briefly explain. (5 marks)

1. If Bank B intends to maximize the profit, will Bank B reduce its lending rates? Briefly explain. (3 marks)

1. Is there a Nash equilibrium to this rate reduction practice? If yes, what is it? (5 marks)

		Bank B
		Reduce	Do not reduce
Bank A	Reduce	million profit Bank B earns	Million profit Bank B earns
	Do not reduce	Bank A earns $100 Million profit Bank B earns $350million profit	Bank A earns $300 million profit Bank B earns $300 million profit