Final answer:
If the interest rate on Treasury bills is higher than the monetary policy rate, the supply of overnight loans decreases, and the demand for Treasury bills increases.
Step-by-step explanation:
When considering the effect of monetary policy on interest rates and the supply and demand for Treasury bills and overnight loans, we must analyze how these rates interact. If the interest rate on Treasury bills is higher than the monetary policy rate, the quantity of overnight loans supplied decreases; simultaneously, the demand for Treasury bills increases due to their higher return compared to the lower monetary policy rate. Therefore, the correct answer is A. Decreases; demand. This scenario is explained by the fact that monetary policy, which may either be tight or expansionary, influences the spectrum of interest rates and the availability of loanable funds. A higher monetary policy rate (i.e., a contractionary policy) generally leads to higher interest rates across the board, thus making borrowing more expensive and investing in financial instruments like Treasury bills more appealing.