1. (10 points) Using the Loan Funds Framework, predict what would happen to: (be sure to draw a diagram of the bond market) a. Government cut taxes and ran a deficit. Assume that people did take into account implications of the deficit for future taxes and as a result wanted to save the entire tax cut and invest it in government bonds. b. While current profits are unchanged, businesses become optimistic about future economic prospects and decide to build new factories. 2. (5 points) Assume that Expectations Theory of the term structure of interest rates is true. Current yields on bonds of maturities 1 year through 5 years are given by: 5%, 6%, 6%, 5%, 4% Back out the expected current and expected future 1-year interest rates for the next five years from the information in the yields on bonds with maturities 1 through 5 year given above