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At t = 0, the yield curve is flat at 5%. An instant later, the Fed announces that it will take the necessary monetary policy

At t = 0, the yield curve is flat at 5%. An instant later, the Fed announces that it will take the necessary monetary policy actions at t = 0 to lower the short-term interest rate at t = 0 to 3%. (For simplicity, the short-term rate is the 1-year spot rate). Further, the Fed states that it expects to remain on hold for about two years. Right after the announcement, the yield curve becomes: r0,1 = 3%, r0,2 = 3.1%, and r0,3 = 4%

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