Question

Suppose a new Congress and administration overrule the independence of the Federal Reserve System and force the Fed to greatly expand the money supply. What effect will this have?

A. On the level and slope of the yield curve immediately after the announcement?

B. On the level and slope of the yield curve that would exist two to three years in the future?

Answer 1

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Answer:

1)

Ths sudden movement to expand the money supply will have the yield curve to shoot up immediately, The demand in market would grow exponentially and will result in inflation and excess supply of money. This will also decrease the short-term interest rates and spur growth

2)

After two to three years in the future, the yield curve will start to dampen/decline, Becasue of the enormous liquidity, it will erode the value of currency and hyper inflation will become a cause of concern for the economy. The yield curve in real terms would be diminshing.