a) The yield curve is flat and the central bank makes a substantial increase in the supply of short-term government securities. What will be the shape of the yield curve according to the segmented markets approach?

(b) Using the expectations approach to the determination of interest rates, calculate the expected interest rate on a one-year investment that will be available in 12 months time (E₁i₁), given the following data:

• current rate of return on a one-year-to-maturity (₀i₁) instrument is 3% per annum
• current rate of return on a two-year-to-maturity (₀i₂) instrument is 5% per annum