Central banks have the ability to affect long-term yields by creating credible expectations of rising short-term rates. When the central bank creates expectations of higher short-term interest rates in the future, investors may demand a higher yield on long-term bonds to compensate for the expected increase in short-term rates. This can result in an upward shift in the yield curve and increase long-term yields.

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Central Banks

Question 49

Multiple Choice

Central banks

A) influence the money market but not the bond market
B) have influence over short term interest rates but no influence over long term interest rates
C) can influence bond yields but not bond prices
D) can raise long term yields, if they create credible expectations of rising short term rates
E) can reduce yields on long term bonds by issuing new debt

Correct Answer: