Response to the following questions:
1. What is the CGAP effect? According to the CGAP effect, what is the relation between changes in interest rates and changes in net interest income when CGAP is positive? When CGAP is negative?
2. Which of the following is an appropriate change to make on a bank's balance sheet when GAP is negative, spread is expected to remain unchanged, and interest rates are expected to rise?
a. Replace fixed-rate loans with rate-sensitive loans.
b. Replace marketable securities with fixed-rate loans.
c. Replace fixed-rate CDs with rate-sensitive CDs.
d. Replace equity with demand deposits.
e. Replace marketable securities with vault cash.