Hello,

could you please provide short answers to the following? In your answers, for simplicity, you can use a yield curve reflecting bonds of only two maturities, short (S) and long (L). (i) Show diagrammatically and explain how conventional monetary policy might influence the yield curve in response to an inflationary shock. (ii) Using a yield curve diagram, show a case where the effective lower bound 'bites'. (iii) Suppose there is an effective lower bound to interest rates, and conventional monetary policy is insufficient to restore demand to a level compatible with medium run equilibrium. Using words and a diagram, show how QE might influence the yield curve to counteract the negative demand shock at the effective lower bound.