Final answer:
The statement is true as market segmentation theory posits that the behavior of financial institutions, by their preferred maturity ranges for investments and lending, determines the shape of the yield curve. The elasticity of savings and changes in risk and return for financial investments also influence the supply curves for capital in various maturity segments.
Step-by-step explanation:
The statement 'The behavior of various kinds of financial institutions determines the shape of the yield curve, according to the market segmentation theory' is true. Market segmentation theory suggests that the yield curve is shaped by the supply and demand for financial capital in different maturity segments, where each segment is influenced by the investment preferences and lending patterns of financial institutions. These institutions tend to operate within specific maturity ranges, leading to differing interest rates based on the supply and demand within those segments. Hence, each segment's unique characteristics contribute to the overall shape of the yield curve.
In markets for financial capital, the elasticity of savings—the percentage change in the quantity of savings divided by the percentage change in interest rates—helps describe the shape of the supply curve for financial capital. When suppliers of financial capital, like savers and investors, decide between different forms of financial investments, they take into account rates of return and risks. A change in these factors could cause a shift in the supply of financial capital between different types of investments, altering their relative supply curves. For instance, if Investment A's risk increases or its return diminishes, savers may transfer funds to Investment B, resulting in a shift in the supply curve for A to the left and for B to the right.
It is also worth noting that in the broader context, the behavior of financial institutions is also influenced by universal generalizations like the essential role of banks, interest rates, borrowing responsibilities, and credit scores. These factors can indirectly influence the shape of the yield curve as they affect the supply and demand dynamics in the capital markets.