On September 21, 2011, The Federal Reserve of the United States announced the implementation of Operation Twist, which was a plan to purchase $400 billion of Treasury securities with maturities of 6 to 30 years and selling Treasury securities with maturities less than 3 years. When selling bonds, the Fed receives money from investors, which will not be circulated in the economy anymore. When buying bonds, the Fed injects money to the economy.
a. Use the asset demand and supply analysis to explain the effect on short-term and long-term interest rates (you can assume there is one market for short- term bonds and another market for long-term bonds).
b. Suppose the current yield curve is upward sloping. How does this affect the shape of the yield curve?
