Real risk-free interest rate as the economy weakens

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(i) What typically happens to the ‘real’ risk-free interest rate as the economy weakens, and what typically happens to it when it gets stronger? How would you explain these general tendencies?

(ii) What typically happens to the ‘credit spread’ between government and risky corporate bonds when the economy enters into a recession? When the economy recovers? What is your explanation?

(iii) What is meant by an ‘inverted’ yield curve? What does it indicate, and why? {Hint: you may want to refer to the ‘pure expectations’ hypothesis of the yield curve.}

Reference no: EM131088906

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