A) Suppose that as the economic recovery strengthened consumer expectations of annual inflation increased from 2% to 3.5 % and, at the same time, the expected real rate of return required to equate investor demand to the existing supply of 1 year Treasury notes increased from 1% to 1.5%. What would you expect to happen to the nominal yields on 1-year T-notes during the period over which these changes in inflation expectations and required real yields occurred? (Give a numerical answer if possible) Explain your reasoning. 3 pts.
B) Draw a supply/demand diagram of the US Treasury bond market to illustrate the effects on it of the developments cited in part A. Label your diagram clearly! 3 pts.