Suppose financial institutions,such as savings and loans,were required by law to make long-term,fixed interest rate mortgages,but,at the same time,were largely restricted,in terms of their capital sources,to deposits that could be withdrawn on demand.Under these conditions,these financial institutions should prefer a "normal" yield curve to an inverted curve.

Question

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A normal yield curve, with higher long-term interest rates, would provide financial institutions with higher returns on their fixed-rate mortgages, thus matching their long-term assets with their long-term liabilities. An inverted yield curve, with lower long-term interest rates, would result in lower returns for financial institutions on their mortgage loans, leading to a potential loss of profitability. Additionally, an inverted yield curve can signal economic uncertainty and potential future economic downturns, which can also negatively impact financial institutions.

Suppose Financial Institutions,such as Savings and Loans,were Required by Law