Question 2

Well done so far! You are on to your second interview round with Ms Susan, the firm's senior

economist. She reminds you of the changes introduced in June 2022 when the US central bank, the

Fed, reversed its Quantitative Easing (QE) policy after almost fifteen years of uninterrupted market

liquidity support and started a phase of Quantitative Tightening (QT).

(a) Examine in less than three hundred (300) words (including any cited reference) two (2)

different reasons for the change in US Fed policy in 2022. (10 marks)

QT had a significant impact on financial markets and institutions. Consider the mechanisms of QT and

how they play out on the activity and the prices in the financial system.

(b) Demonstrate in less than four hundred (400) words (including any cited reference) the

impact of QT on five (5) areas of the financial system, namely the stock market, government

bonds, corporate bonds, bank lending, and the US dollar. (10 marks)

The stance of the US Fed as of 1 August 2023 is less certain than a year ago. Fed officials decided to

hold off raising interest rates in June, opting for a pause to assess the impact of ten previous hikes.

The decision was made despite disagreement among members. Yet, at the end of July, the Fed chose

to proceed with a new rate increase.

(c) Discuss in less than three hundred (300) words (including any cited reference) what you

think are two (2) different possible motives behind the Fed's recent hesitations. (10 marks)