For all questions be sure to show your work and/or explain your reasoning! 1. B R* CP R L Market for LT Bonds L B The above diagram depicts the equilibrium CP(interest risk) and quantity in the market for long- term bonds. Here R represents the long-term interest rate that would prevail in a pure expectations world. Answer the following questions based on the information in the diagram, and explain your reasoning. a. Based on the information in the diagram, can you say whether today's yield curve slopes up or down? (That is whether the current long rate, R*, is higher or lower than the current short rate, r1.) b. Suppose now you have also learned that the consensus market prediction is that short term rates will remain at their present level (r = r2= r3 = ... = re...). [Note that the amount of uncertainty about these predictions has not changed, that is the amount of interest rate risk remains unchanged.] How does this new information change your answer to (a)? c. Do more borrowers or more lenders "naturally" to prefer long term bonds? d. In the actual equilibrium that results, are there more borrowers or more lenders in the long- term bond clientele? (That is are there more sellers of long-term bonds or buyers of long-term bonds/)