$6.$ Flight to quality: U$.$S$.$ financial markets

Suppose that fear and uncertainty overtake the financial markets, causing investors to sell municipal bonds and flee into the Treasury market. This movement of funds from financial instruments with relatively high default risk to financial instruments with lower default risk, caused by investors seeking certainty and stability, is referred to as a flight to quality.

The following two graphs show loanable funds market for Treasury bills and municipal bonds. Suppose that initially, there is a difference between the interest rate in the T$-$bill market and the interest rate in the muni bonds market, called the default risk premium spread.

Adjust the following graph to show the effect of the flight to quality on the loanable funds market for municipal bonds.Flight to quality: U$.$S$.$ financial markets

Suppose that fear and uncertainty overtake the financial markets, causing investors to sell municipal bonds and flee into the Treasury market. This

movement of funds from financial instruments with relatively high default risk to financial instruments with lower default risk, caused by investors

seeking certainty and stability, is referred to as a flight to quality.

The following two graphs show loanable funds market for Treasury bills and municipal bonds. Suppose that initially, there is a difference between the

interest rate in the T$-$bill market and the interest rate in the muni bonds market, called the default risk premium spread.

Adjust the following graph to show the effect of the flight to quality on the loanable funds market for municipal bonds.

Loanable Funds Market for municipal Bonds