a. Suppose that you are an economist working in a central bank. You observe that yield curves for government securities in your country have a negative slope. Discuss in detail how this information can be used by policy makers at the central bank.

1. b. Suppose that you also observe a sharp increase in the difference between the yields on the BAA rated corporate bonds and AAA rated corporate bonds. What does this suggest about the possible lending behavior of commercial banks?

1. c. Given the scenarios of questions 2.a and 2.b above, describe in as much detail as possible what policy recommendations you would make to the monetary policy committee.