The following sub-questions are about the link between interest rates and government regulations of the financial system as well as the supply of government bonds.

a) In the financial sector, there are some companies that specialize in small loans called "payday loans." These loans are small loans that are made to low-income borrowers. Often these borrowers have poor credit histories and few assets and would have difficulty in qualifying for loans from other sources. The interest rates on these loans are often very high and some commentators have suggested that ceilings should be enforced on these loans. If such interest rate ceilings were imposed, what would be the likely effect? [6 marks]

b) A member of Parliament argues: "The central bank has too much discretion over granting discount loans. Parliament should set the discount rate and then require that the central bank grants loans to any depository institution that wishes to borrow at that rate." Do you agree that this would be a good policy? [6 marks]

c)Explain whether a decrease in the supply of the maximum maturity Treasury bonds would affect their yields, given that the term structure follows the expectations theory. [6 marks]