Yield curve - monetary and fiscal policies

CFA Level III Economics
#1

I am really not an economist, here’s the problem I ran into:

Book 3, Section 4.1, Exhibit 20 (pg 67) does not offer too much explanation but it states that moderately upward sloping yield curve must be the result of loose monetary and tight fiscal policy.

Based on a practice question (in Mark Meldrum’s Mock no. 2) I understand from the explanation, that when the short-term rates start to increase, as a result of which the yield curve becomes moderately upward sloping from steeply upward sloping it signals a tight monetary policy but loose fiscal policy.

I think I understand the latter explanation, yet it conflicts with what the curriculum writes both in a sentence and a clear table.

What to do on this?

#2

There’s no conflict, they talk about the same thing.

Monetary - impact short term rates

Fiscal - impacts long term rates

There are 4 possibilities, each leading to a different type of curve. When any rate moves up or down, the curve adjusts accordingly.

Easier to understand if you draw this out in x-y axis.

#3

Yeah this is clear but if the question is:

What are the relevant policies when the YC is moderately upward sloping? What is your answer?

CFA curriculum: loose Monetary + tight Fiscal

Mark Meldrum (S2000): tight Monetary + loose Fiscal

It was an MC question so no room for reasoning.

#4

If that’s what (somebody who shall remain nameless) wrote on Mark’s exam, then it’s an error and needs to be corrected.

Please let me know which exam and which question it is.

#5

It is question 16 on 2nd Exam PM session.

I downloaded the exams (and answers) into PDF yesterday, I don’t know if there are (could be) revisions.

#6

I’ll look into it.

#7

Moderate only upward sloping is only, as far as I’ve read amongst CFA text, loose monetary, tight fiscal.

less clear when it’s tight monetary, loose fiscal.

Can you post the questions please, I’d be interested to know more from a learning perspective.

Thanks

#8

can someone clarify how fiscal policy changes the long end of the curve? does it have to do with supply and demand for money like monetary in the short end? what are the dynamics behind it?

thanks!

#9

Inflation expectations

#10

ahhhhh. simple answer and perfect answer. thank you