Q4. a) Use demand and supply analysis to explain the effect in the bond market of a decrease in the federal deficit. What is the effect on the interest rate and bond prices? (6 marks) ) [motivate briefly (in words) each change that you claim will happen as a consequence of the decrease in the federal deficit]

b) (i) Use demand and supply analysis of the bond market to explain what happens to the interest rate in case investors suddenly anticipate that inflation will be 1% higher next year than this year. (ii) Does it even matter that investors "suddenlyanticipate 1% higher inflation next year" (i.e. what if investors already "knew" before today?) Motivate your answer briefly, as always) (8 marks)