ECONOMICS
MONETARY POLICY
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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Bond yield will rise. Interest rates rise.
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Bond yield will rise interest rates will fall
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Either A or B
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None of the above
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Detailed explanation-1: -The process of reversing or ‘unwinding’ QE, either by stopping reinvestments or selling bonds, is sometimes called ‘quantitative tightening’, or QT. It raises interest rates and lowers inflation. But the size of this impact depends on the economic circumstances of the time.
Detailed explanation-2: -QE decreases the yield on all long-term nominal assets, including Treasuries, Agency bonds, corporate bonds, and MBS. ii. The effects are larger effects for longer duration assets. It is important to emphasize that this channel implies an increase in Treasury yields.
Detailed explanation-3: -Quantitative easing entails the creation of new bank reserves that are used to purchase government bonds (for example, from pension funds). This increases bond prices, which reduces bond yields and lowers interest rates in the real economy.
Detailed explanation-4: -Rising bond yields are a negative for bond holders because of the inverse relationship between bond yields and bond prices. When yields rise, prices of current bond issues fall. This is a function of supply and demand.