Question

15 points QUESTION 10 Lets assume the banking system in Europe got into some trouble and banks start making large losses and their solvency risk is increasing. You know that most European banks' assets have a longer duration than their liabilities. Which is the best option for the European Central Bank (ECB) to make banks more profitable again? @ The ECB could sell large amounts of short-term and buy long-term bonds to steepen the yield curve The ECB could buy large amounts of short-term and long-term bonds to steepen the yield curve The ECB could buy large amounts of long-term bonds to steepen the yield curve The ECB could buy large amounts of short-term and sell some long-term bonds to steepen the vield curve 25 nointe Cick Save and Submit to save and submůt. Click Save All Answers to save all answers Save All Answers Save a

Answer 1

Solution: The ECB could buy large amounts of long-term bonds to steepen the yield curve.

Explanation: The strategy focus on buying longer dated bonds and selling them after 2 to 3 years to earn profit from their increase in value during that time. As long as longer term bonds yields more than the shorter term bonds (also known as a normal or steep yield curve), it can increase the returns over buying a shorter term bond and holding