Morgan Salaz is a fixed income analyst responsible for advising fixed income clients about bond trading opportunities. In the current recessionary environment, the level of government bond yields is low and the term structure is nearly flat. Salaz’s firm forecasts that after a brief recession, economic growth will return quickly during the coming 12 months.

Salaz also expects the Federal Reserve to decrease asset purchases of long-term bonds as the economic recovery continues. Which of the following scenarios is consistent with this view? The reduced asset purchases will likely:

A. Amplify the effect of increased economic activity on the term spread.

B. Dampen the effect of increased economic activity on the term spread.

C. Have no effect on the term spread.