In the diagram above, which statement concerning the yield curve is likely to be
ID: 2440920 • Letter: I
Question
In the diagram above, which statement concerning the yield curve is likely to be true?
The Federal Reserve has increased short-term rates using monetary policy shifting the entire term structure of interest rates up.
The Federal Reserve has decreased short-term rates using monetary policy shifting the entire term structure of interest rates up.
The amount of planned transactions has decreased shifting the entire structure of interest rates up.
The demand for money has decreased shifting the entire term structure of interest rates up.
The Federal Reserve has decreased long-term interest rates using monetary policy shifting the entire term structure of interest rates up.
A.The Federal Reserve has increased short-term rates using monetary policy shifting the entire term structure of interest rates up.
B.The Federal Reserve has decreased short-term rates using monetary policy shifting the entire term structure of interest rates up.
C.The amount of planned transactions has decreased shifting the entire structure of interest rates up.
D.The demand for money has decreased shifting the entire term structure of interest rates up.
E.The Federal Reserve has decreased long-term interest rates using monetary policy shifting the entire term structure of interest rates up.
Yield Yield Curve 2 Yield Curve 1 Short Medium Long Term Term TermExplanation / Answer
Parallel upward shift of yield curve as shown in the above diagram. Yield curve shifts parallely upward when the interest rate for all short term, intermediate term and long term increases by the same number so that the curve shifts parallely upward.
This happens when the demand of money has decreased shifting the entire term structure of interest rates up because fall in demand of money implies that there is an excess supply of money and thereby increases interest rate that raise more demand for bonds and hence higher interest rates for all short, intermediate and long term. Also, lower demand of money implies higher demand of bonds and thus higher interest rates and upward parallel shift of the yield curve. Therefore, option d is correct that the demand for money has decreased shifting the entire term structure of interest rates up.