As a result of this flight to liquidity, the interest rate in the 20-year Treasury bonds market ________________ ( decreases/ remains the same/ increases) , while the interest rate in the T-bill market ________________ ( decreases/ remains the same/ increases) . Consequently, the default risk premium spread ________________ ( decreases/ remains the same/ increases)
As a result of this flight to liquidity, the interest rate in the 20-year Treasury bonds market ________________ ( decreases/ remains the same/ increases) , while the interest rate in the T-bill market ________________ ( decreases/ remains the same/ increases) . Consequently, the default risk premium spread ________________ ( decreases/ remains the same/ increases)
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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As a result of this flight to liquidity, the interest rate in the 20-year Treasury bonds market ________________ ( decreases/ remains the same/ increases) , while the interest rate in the T-bill market ________________ ( decreases/ remains the same/ increases) . Consequently, the default risk premium spread ________________ ( decreases/ remains the same/ increases)
Transcribed Image Text:Adjust the following graph to show the effect of the flight to quality on the loanable funds market for 3-month Treasury bills.
INTEREST RATE ON T-bills
Loanable Funds Market for 3-month T-bills
QUANTITY
Complete the following statement.
Supply of T-bills
Demand for T-bills
Demand for T-bills
Supply of T-bills
As a result of this flight to liquidity, the interest rate in the 20-year Treasury bonds market
bill market
Consequently, the default risk premium spread
(?)
while the interest rate in the T-
Transcribed Image Text:5. Global flight to quality
In the autumn of 2008, investors, concerned about liquidity in debt markets around the world, fled markets deemed risky into markets that offered
greater liquidity. The flight to liquidity can be seen in the interest rate spread between 3-month Treasury bills and 20-year Treasury bonds.
The following two graphs show the loanable funds markets for 20-year Treasury bonds and 3-month T-bills.
Adjust the following graph to show the effect of the flight to quality on the loanable funds market for 20-year Treasury bonds.
INTEREST RATE ON BONDS
Loanable Funds Market for 20-year Treasury Bonds
QUANTITY
Supply of LF
Demand for LF
O
Demand for LF
Supply of LF
(?)
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