The central bank of a major economy decides to embark on a sustained programme of Quantitative Tightening (QT) by actively selling government bonds on the secondary market. All other things being equal, which of the following is most likely to result from this monetary policy action?
Commercial bank reserves held at the central bank will increase, leading to an expansion of bank credit.
The market price of government bonds will rise, lowering long-term borrowing costs for businesses.
Government bond prices will fall, causing long-term interest rates to rise and aggregate demand to contract.
The domestic currency will depreciate as financial capital flows out of the economy.
176 exam-style questions on AQA A Level Economics 2.4 Financial markets and monetary policy (A-level only), covering 2.4.1 The structure of financial markets and financial assets, 2.4.2 Commercial banks and investment banks, 2.4.3 Central banks and monetary policy, and 2.4.4 The regulation of the financial system. Each one has a worked solution and a mark scheme showing where the marks go.