Hey,

I have following struggle:

1. One of the necessary conditions for countries to enter the European Monetary Union (cf. the Maastricht Treaty (1992)) was that countries with large budget deficits had to diminish their deficits below 3% of national income. This can partly explain why cross border interest differential between large deficit countries and small deficit countries came down in the 2ndhalf of the 90s (so-called interest rate convergence). Explain this observation using the supply and demand for bonds framework.
2. Rating agencies like Moody's or Standard and Poor's downgraded corporate debt of a largenumber of banks during the credit crunch. This typically led to an instantaneous decrease in the market value of corporate debt and an increase in the yield to maturity. Explain this observation using the supply and demand for bonds framework.