Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
The yield on Treasury bills decreases as demand for money increases.
B
The yield on Treasury bills remains unchanged regardless of money demand.
C
The yield on Treasury bills increases as demand for money increases.
D
The yield curve becomes flatter when there is an increase in money demand.
Understanding the Answer
Let's break down why this is correct
Answer
When more people want to hold money, it means they are looking to save or invest rather than spend. This increase in demand for money can lead to higher interest rates because people are willing to pay more to borrow money. In the money market, Treasury bills are considered safe investments, so when demand for money rises, investors may prefer to buy these bills, pushing their prices up. As the price of Treasury bills goes up, the yield, or the return on those bills, actually goes down. For example, if a Treasury bill that pays $100 in the future is bought for $90, the yield is lower than if it were bought for $80, showing how increased demand can lower yields.
Detailed Explanation
When more people want money, they buy fewer Treasury bills. Other options are incorrect because Some might think that demand for money doesn't change yields; This option suggests that higher demand leads to higher yields.
Key Concepts
demand for money
Treasury bills
yield curves.
Topic
Money Market Dynamics
Difficulty
hard level question
Cognitive Level
understand
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