Question

Assume that the one-year interest rate is on the vertical axis of the IS-LM model and that the yield curve is initially upward sloping. Suppose that financial market participants expect that the central bank will pursue an open market purchase of bonds in the future. Given this information, we would expect which of the following to occur?

A. The yield curve will become flatter.
B. The yield curve will become vertical.
C. The yield curve will become steeper.
D. The yield curve will become downward sloping.

Answer 1

Answer: A. The yield curve will become flatter.

Step-by-step explanation:

With the information given in the question, then it should be expected that the yield curve should be flatter.

On the other hand, if the participants that are in the financial market expect the central bank to pursue a contractionary monetary policy in the future, then the yield curve will become steeper.