Suppose that the Federal Reserve is concerned about rising inflation, so they increase short- term interest rates. How will this affect long-term rates and the yield curve? What does the slope of the yield curve reveal about the effectiveness of the Fed's policy? Explain in the context of the Liquidity Premium Theory.
What will be an ideal response?
The increase in the short-term rate may cause the yield curve to flatten. In addition to raising short-term rates, the policy will reduce expected inflation, reducing the risk premium associated with longer-term bonds. The more the curve flattens, the greater the confidence of investors that the central bank will limit future inflation.
You might also like to view...
Pollution taxes always cause deadweight losses, reducing economic efficiency
a. True b. False Indicate whether the statement is true or false
An increase in our federal government's budget deficit will likely:
a. increase the national debt. b. increase interest rates. c. be less effective in stimulating the economy than the spending multiplier implies because of crowding out. d. decrease borrowing by households and businesses. e. All of the answers are correct.
Why does the short-run aggregate supply curve shift to the right in the long run, following a decrease in aggregate demand?
A) Workers and firms adjust their expectations of wages and prices upward and they push for higher wages and prices. B) Workers and firms adjust their expectations of wages and prices upward and they accept lower wages and prices. C) Workers and firms adjust their expectations of wages and prices downward and they accept lower wages and prices. D) Workers and firms adjust their expectations of wages and prices downward and they push for higher wages and prices.
Which of the following is a characteristic of a monopoly market?
A. the firm can influence market price B. one firm is the only supplier of a product for which there are no close substitutes C. entry into the market is blocked D. all of the above