3. Based upon your answer to I. draw in the action taken by the Fed to achieve the desired interest rate. Does the Fed need to buy or sell T-bills to achieve their objective? Briey explain. (3 points) 4. Assume the government bond supply curve already accounts for the federal reserve action in 2028. Now fill in the remaining quadrant, making sure to correctly identify the equilibrium interest rate. (4 points) 5. Based upon your answer to question 1, is Fed policy neutral? IF NOT, SHOW QUANTITATIVELY HOW TIGHT OR EASY POLICY IS: (4 points) 6. Why do you think they chose to be easy/tight or neutral? (4 points) Section 7 - Expanded Loanable Funds Model and Monetary Policy (21 points) The FOMC of the U.S. Federal Reserve, December of 2027, provides the following median forecast for year-end 2028: FOMC Expectations FOMC Parameters: Inflation 3% a for Taylor Rule 0.5 Unemployment 3% U* 4% r* 1% 2% Budget Deficit $1 trillion Deficit Financing Plan 50% t-bills and 50% t-bonds Risky/Risk Free Bond Spread 2.25% u a NW NW NW 1 6 2 3 8 1. What would you expect the fed funds rate to be, year-end 2028 (hint: Use Taylor's Equation)? (3 points) 2. Label the three quadrants in the diagram above. Based upon the deficit financing draw in the demand curve for both T-bonds and T-bills. (3 points)