To curb accelerating inflation, a central bank implements contractionary monetary policy by raising its policy interest rate and embarking on a programme of Quantitative Tightening (selling government bonds back to the financial sector).
Other things being equal, what is the most likely consequence of these policy measures?
A fall in the yield of government bonds, reducing the cost of sovereign debt servicing.
A decline in commercial bank reserves and a fall in the market prices of existing government bonds.
An increase in the market prices of corporate bonds, stimulating investment through a positive wealth effect.
An expansion in commercial bank credit creation as commercial banks look to maintain lending volumes.
