1.(15 points) Estrella (NY Fed) is quite certain that the yield curve is a good predictor of future economic activity. From the case, or the link to his FAQs, answer the following questions:

a.How successful is the yield curve at predicting recessions?

b.What matters most - the level of the term spread, the change in the spread, or the level of short term interest rates?

c.Discuss why a yield curve inversion should lead to a recession.

2.(15 points) Dick Berner (Morgan Stanley) is a bit more skeptical about the predictive power of the yield curve. Does he just not understand Estrella's overwhelming evidences, or does his skepticism rest on solid reasoning?

3.(10 points) How is the U.S. yield curve currently sloped? What does it affect your forecast of economic activity?