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3. Suppose the current 3 month interest rate is 0.4 . The expected 3 month rates each quarter ahead are given as 1.4,2.8,4.1. (a) Draw
3. Suppose the current 3 month interest rate is 0.4 . The expected 3 month rates each quarter ahead are given as 1.4,2.8,4.1. (a) Draw the yield curve under expectation hypothesis. (b) If the central bank successfully convinced people to believe that future rates would be lowered, say 1,2,2, how would it affect the yield curve? (c) What empirical fact does the expectations hypothesis gets right? What empirical finding the expectations hypothesis cannot explain
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