Question: QUESTION 4: 6 POINTS The two largest countries in the world, Westeros and Essos, enter a financial war. Essos decides to stop buying more of

QUESTION 4: 6 POINTS The two largest countries in the world,

QUESTION 4: 6 POINTS The two largest countries in the world, Westeros and Essos, enter a financial war. Essos decides to stop buying more of Westeros' one-year Treasuries securities while sell off its current holdings of Westeros securities. This leads to a decrease in quantity demanded and an increase in quantity supplied at any price level in the market for Westeros' one-year securities. In previous exercise, we have discovered that this action will cause the equilibrium price on Westeros' one-year securities to decreases, which translates to an increase in equilibrium interest rates on Westeros' one-year securities. (1) Before the action is taken, the yield curve of Westeros is flat as shown in the graph below. Assume Expectations theory holds, draw the new yield curve after the action is taken. (5 points) 1-year 5-year 10-year 20-year 30-year (2) Based on the slope of the new yield curve, which phase of the business cycle do you think Westeros is entering? (1 point)

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