1. In this question, we will consider the use of forward guidance by a Central Bank (CB). Suppose that the interest rate on a one-year bond is 0.5% and that the market currently expects the interest rate on a one-year bond to be 1.0% next year and 1.5% the following year. a) (3 points) Using Pure Expectations Theory, calculate the current two-year and three-year spot rates. b) (4 points) Now suppose the CB announces that it is committed to doing everything it takes to keep one-year rates at 0.5% for the next three years and suppose further that the market believes the CB. What is the CB trying to achieve? Calculate what will happen to the current two-year and three-year spot rates. c) (3 points) Describe the importance of CB credibility in this situation. That is, what would happen if the market did not believe the CBs announcement?