Which of the following statements regarding the monetary policy transmission mechanism is most accurate?
A)
Central banks can control long-term interest rates directly because decisions by consumers and businesses are based on these rates.
B)
Central banks can control short-term interest rates directly, but long-term interest rates are beyond their control.
C)
Central banks can control short-term interest rates by increasing the money supply to increase interest rates or by decreasing the money supply to decrease interest rates.
**The correct answer was B)**Central banks can control short-term interest rates directly, but long-term interest rates are beyond their control.
Does the new quantative easing part of Econ make B false as well? Or am I misunderstanding.
think of the other side of the equation… the fed adds liquidity buy buying outstanding treasury obligations on the open market. but there are also other issuers including corporates that raise funds at a rate set at market auction.
even if the fed states they will buy all the the outstanding LT treasury bonds in the open market tomorrow -yes the price of those bonds will rise BUT it will NOT effect the funding costs of new issuers… think of a corporate trying to issue 10 year debt the following day… the market rate for new issues will include the new inflation expectations and risk premiums regardless of what the fed mandate is in regards to adding liquidity to the market buy buying treasuries. the fed stating they will buy all LT debt will acceleteate ST inflation…
i am not a professor but someone else will confirm and elaborate on what i just wrote… the better question is "why cant the fed control LT rates DIRECTLY??