we are asked to evaluate whether this statement is right Statement 6: Regulation Q imposed a ceiling on interest rates paid by banks for certain bank deposits. q:
After Regulation Q was imposed, the demand for money market funds most likely:
- increased.
- decreased.
- remained unchanged. answer is a. this doesn’t make sense. ceilings on interest rates mean that that’s the maximum interest rate the bank is going to pay. why would investors want this? it would have made sense if the statement read that there was a floor on interest rates. i.e. minimum amount to be paid which guarantees some kind of return. Im not understanding the answer to this q.
The question is about demand for money market funds, not supply of money market funds.
Investors are suppliers, not demanders.
SHow are investors suppliers? Investors demand a return from money market funds right? If this isn’t true then who demands these money market securities? Sorry but I’m still noy following this. could you pls break this down for me more?
They lend money at money market rates.
Wrong.
Investors demand a return _ for _ money market funds.
The question isn’t about the demand for the securities; it’s about the demand for the funds: the money used to buy those securities.
You (investor/lender) lend me (borrower/demander) money, and I pay you interest. I demand the funds and you supply the funds. If there’s an upper limit on the interest that I will have to pay, then I’m likely to demand more money, and you’re likely to supply less money.
Ok so when we say investors invest in money market funds what that means is that investors are giving you money to buy money market instruments. So if there’s a cap on how much interest rates I need to pay the investor to do that then I’m going to demand more of such funds or funding. Is that correct?
Yes: borrowers prefer cheap money to expensive money.
Sorry to necro this thread - I would just like to confirm this interpretation given the exact language in the answer:
“6. A is correct. Regulation Q set a ceiling on the interest rates paid by banks for various types of deposits, which resulted in investors’ shifting funds to money market funds.”
The answer states that investors are moving money TO money market funds, which would imply that they’re purchasing money market securities, no? Or is this a poorly worded solution by CFAI?
Edit: Please disregard. As reference: it seems that the key point here is that bank deposits are not the same as money market funds. There’s less demand for bank deposits and more demand for money market securities.