Question 3: In the winter of 1994, the yield curve sloped upward, but the Federal Reserve Board was concerned that the economy might be overheating. In response, the Board raised short-term interest rates a number of times. At first the yield curve simply shifted upward in a roughly parallel movement. Eventually, it began to flatten, at which point the interest rate stopped rising. Using the expectations hypothesis, explain what happened. Question 4: In Sessions 6 and 7 there is a discussion of demand for and supply of bonds. This question ask you to construct graphs of municipal bonds and Treasury bonds and detail what happens in these two markets for the following: Step 1: Tax-free status shifts the demand for municipal bonds to Step 2: And shifts the demand for Treasury bonds to Step 3: With the result that municipal bonds end up with a higher price and lower interest rate than the Treasury bonds. Question 3: In the winter of 1994, the yield curve sloped upward, but the Federal Reserve Board was concerned that the economy might be overheating. In response, the Board raised short-term interest rates a number of times. At first the yield curve simply shifted upward in a roughly parallel movement. Eventually, it began to flatten, at which point the interest rate stopped rising. Using the expectations hypothesis, explain what happened. Question 4: In Sessions 6 and 7 there is a discussion of demand for and supply of bonds. This question ask you to construct graphs of municipal bonds and Treasury bonds and detail what happens in these two markets for the following: Step 1: Tax-free status shifts the demand for municipal bonds to Step 2: And shifts the demand for Treasury bonds to Step 3: With the result that municipal bonds end up with a higher price and lower interest rate than the Treasury bonds