Interest rates rise and yields on money market instruments increase well above interest rates offered by banks. Investors, therefore, invest directly in the higher yielding instruments with funds they have withdrawn from banks. This is known as which of the following?

Interest rates rise and yields on money market instruments increase well above interest rates offered by banks. Investors, therefore, invest directly in the higher yielding instruments with funds they have withdrawn from banks. This is known as which of the following?

• A. Disintermediation
• B. Intermediation
• C. Crowding out
• D. The multiplier effect

Answer: (A)

Disintermediation happens when savers bypass financial intermediaries and put their money directly into market instruments that offer higher yields. In this case, as money market yields rise above what banks pay, funds withdrawn from banks flow straight into those higher-yielding instruments. That reduces bank funding from deposits and shifts savings directly into the securities market. The other terms describe different ideas—intermediation is the usual process of funds moving through banks, crowding out is when government borrowing crowds out private investment, and the multiplier effect refers to how initial spending can lead to a larger overall impact on income.

Disintermediation happens when savers bypass financial intermediaries and put their money directly into market instruments that offer higher yields. In this case, as money market yields rise above what banks pay, funds withdrawn from banks flow straight into those higher-yielding instruments. That reduces bank funding from deposits and shifts savings directly into the securities market. The other terms describe different ideas—intermediation is the usual process of funds moving through banks, crowding out is when government borrowing crowds out private investment, and the multiplier effect refers to how initial spending can lead to a larger overall impact on income.