1. The short end of the yield curve (interest rates for maturities one year and less) is interpreted by financial markets as forecasts of monetary policy decisions for the coming year. Right now, these interest rates are predicting that the Fed will leave the policy rate unchanged for next year. Graph the first year of the yield curve for unchanged interest rates.

Suppose next week at the next press conference, Chairman Powell announces that the Fed has decided to pursue a more restrictive policy, increasing the policy rate 25 basis points (0.25%) in June and again in September 2021. On the same graph, draw a dotted line that shows the new yield curve following the press conference.

In a second graph, compare the growth of the quantity of money over time for no change in interest rates (solid line) and for rising rates (dotted line). Which policy has the higher average money supply for the year?

Graph the IS and LM curve for the unchanged interest rate policy. Add the LM curve for the increased interest rate policy. Compare the old equilibrium interest rate and income to the new interest rate and income.