Final answer:
The demand for financial capital is the primary driver of the left-hand end of the short-term yield curve. A higher demand leads to higher short-term interest rates, while a decreased demand leads to lower short-term interest rates.
Step-by-step explanation:
The primary driver of the left-hand end of the yield curve, specifically the short-term end, is the demand for financial capital. When businesses or investors have a high demand for financial capital, the yield curve shifts to the right, indicating higher short-term interest rates. Conversely, when there is a decreased demand for financial capital, the yield curve shifts to the left, indicating lower short-term interest rates.
For example, during the technology boom of the late 1990s, businesses had high confidence in the returns of investments in new technology, leading to an increase in their demand for financial capital. This resulted in the short-term end of the yield curve shifting to the right, indicating higher short-term interest rates.
On the other hand, during periods of economic recessions like the 2008 and 2009 Great Recession, the demand for financial capital decreases as businesses become less confident in their investment opportunities. This causes the short-term end of the yield curve to shift to the left, indicating lower short-term interest rates.