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Loanable funds market for 3-month treasury bills

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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.

Graph the effect of the flight to quality on the loanable funds market for 3-month Treasury bills.

demand t bills ( shift to the left or right)

supply t bills ( shift to the left or right)

graph the effect of the flight to quality on the loanable funds market for 20-year Treasury bonds

demand for LF ( shift to the left or right)

supply of LF ( shift to the left or right)

As a result of this flight to liquidity, the interest rate in the 20-year Treasury bonds market ( decrease, increase, remain the same) while the interest rate in the T-bill market ( increase, decrease, remain the same) Consequently, the default risk premium spread ( decrease, increase, remain the same)

Reference no: EM133259956

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