Expected increase in interest rates

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In recent news, the Fed signalled that it will reduce its purchases of Treasury securities and agency mortgage backed securities, which served to offset the economic hardships caused by the Covid pandemic. Investors also expect that the Fed will raise interest rates within the next six months given the persistent rising of US inflation.

a) Explain the monetary policy tool the Fed was implementing in its purchase of debt securities. What effect will reducing these purchases have on the money supply and broader economy?

b) If bond investors expect that interest rates will increase over the next year, what changes might they make to their bond portfolios? Provide an example in your discussion.

c) What effect will an expected increase in interest rates have on the demand and supply of loanable funds?

Reference no: EM133066995

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