Question 1:

Describe how your monetary policy action is expected to affect the Treasury yield curve, assuming that the market participants expect that the Fed will be able to correct the inflationary behavior fairly quickly and that the inflation will come back to its historical levels within one to two years. In your response to this question, please:

• Explain whether and why you expect to see the bond yields to rise or fall;
• Explain whether and why this effect will be more pronounced for short-term or long-term bonds; and
• Characterize the behavior of the yield curve as bullish flattening, bullish steepening, bearish flattening, or bearish steepening, and explain your judgment.

Question 2:

Describe why and how your recommendation will affect banks and banks' lending policies. Please identify and explain the three channels through which the supply of credit will be affected; and note how the supply of credit will be affected.

Question 3:

Identify and explain at least two ways through which firms' investment decisions will be affected by your recommendation.

Question 4:

Consider two households that bought their houses and obtained their mortgages 7 years ago:

• Household A purchased their house with a 30-year, 5/6 hybrid adjustable-rate mortgage (ARM) (that is, the mortgage rate resets every 6 months based on a benchmark rate after the initial 5-year fixed period), and
• Household B financed their home purchase with a 30-year fixed rate mortgage.

Discuss how your monetary policy recommendation affects each household in terms of its consumption patterns, and which household is more likely to immediately respond to your recommendation.