CFA Level I · CFA Level I Exam · Monetary Policy
A central bank conducts quantitative easing by purchasing long-term government bonds from banks and paying with newly created reserves. The most likely immediate effect of this action on the bond market is:
Quantitative easing most likely lowers long-term yields. The central bank's purchases raise demand for long-term bonds, which pushes their prices up and yields down, and this reduces borrowing costs more broadly. Supply to private investors shrinks, so yields do not rise.
- Alower long-term yields as bond prices riseCorrect
- Bhigher long-term yields as bond supply increases
- Cunchanged long-term yields as reserves offset the purchases
Explanation
Central bank purchases increase demand for long-term bonds, raising prices and lowering yields. This also reduces borrowing costs for firms and households. Supply available to private investors falls rather than rises, so the higher yields option is wrong.
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