Question

M1 money growth in the U.S. was about 15% in 2011 and 2012, and 10% in 2013. Over the same time period, the yield on 3-month Treasury bills was close to 0%. Given these high rates of money growth, why did interest rates stay so low, rather than increase

Answer 1

Answer:

The reason is that high rates of money growth actually lower interest rates.

Explanation:

During economic hardship, governments employ expansionary fiscal policy: this policy consists in the central bank (the Fed in the case of the U.S.) printing money to lower interest rates. The reason is that more money in the economy raises the availability of loanable funds, and this reduces in turn the interest rates that securities pay.

Government bonds, being the safest security, will have their interest rates reduce substantially during times of high money growth due to expansionary fiscal policy.