a. The immediate effect on the yield curve would be to lower interest rates in the shortterm

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a. The immediate effect on the yield curve would be to lower interest rates in the shortterm end of the market, since the Fed deals primarily in that market segment. However, people would expect higher future inflation, which would raise long-term rates. The result would be a much steeper yield curve.

b. If the policy is maintained, the expanded money supply will result in increased rates of inflation and increased inflationary expectations. This will cause investors to increase the inflation premium on all debt securities, and the entire yield curve would rise; that is, all rates would be higher.

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Financial Management Theory And Practice

ISBN: 9780324259681

11th Edition

Authors: Eugene F Brigham, Michael C Ehrhardt

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