Question

Explain the different effects that quantitative easing and operation twist were expected to have on the yield curve. Quantitative easing pushes the upper end of the yield curve down directly, thereby holding down the interest rate for investors and stimulating asset markets and the economy. Operation twist places downward pressure on the long-term rate and upward pressure on the short-term rate. Quantitative easing pushes the upper end of the yield curve up directly, thereby not changing the interest rate for investors and not stimulating asset markets and the economy. Operation twist places no pressure on the long-term rate and upward pressure on the short-term rate. Quantitative easing pushes the lower end of the yield curve down directly, thereby holding up the interest rate for investors and stimulating asset markets and the economy. Operation twist places upward pressure on the long-term rate and downward pressure on the short-term rate. Quantitative easing shifts up the upper end of the yield curve directly, thereby holding up the interest rate for investors and depressing asset markets and the economy. Operation twist places upward pressure on long-term and short-term rates.

Answer 1

Answer:

Operation Twist is a program which is used by the FED to use the proceeds from the sale of short-term bonds to buy the long-term bonds. This is intended to put the downward pressure on the long-term yield. By buying the long-term bonds from the proceeds from short-term bills increases the demand for the bonds. Increased demand increases the price of them which makes the yield to decline as the difference between face value and the coupon or the purchase value decline.

Quantitative easing, on the other hand, is purchasing the bonds by the government which pushes up the prices of the bonds in the economy and so decreases the interest rates, a move made to make the monetary conditions easier. (C)