Suppose analysts have forecasted one-year T-bill rate for the next five years for two alternative economic scenarios Bullish Economy and Bearish Economy.

a. Following the argument of expectation theory, calculate expected interest rate of long-term bonds with different maturities in the tables below (3 points) -

Scenario 1: Bullish Economy
Year	Expected interest rate of 1-year bond	Maturity of long-term bond	Expected interest rate of long-term bond
2021	5.00%	1-year
2022	6.00%	2-year
2023	6.50%	3-year
2024	7.00%	4-year
2025	7.60%	5-year

Scenario 2: Bearish Economy
Year	Expected interest rate of 1-year bond	Maturity of long-term bond	Expected interest rate of long-term bond
2021	5.00%	1-year
2022	4.80%	2-year
2023	4.30%	3-year
2024	4.00%	4-year
2025	3.00%	5-year

b. Draw two graphs of yield curves and copy them below, one for Bullish economy and another for Bearish economy. In each graph, the vertical axis would show expected interest rate of long-term bonds and the horizontal axis would show the maturity of the bonds. (3 points)

c. Do you see any differences in the two graphs? Explain why one yield curve is upward sloping while another one is downward sloping. (3 points)