Explain how each stage of the business cycle shapes policy and short-term rates, the steepness of the yield curve, and how bonds of shorter and longer maturity perform against each other

In a slowdown or recession the central bank cuts, short yields fall furthest and the curve steepens, as investors expect later rises. As an expansion matures and inflation builds, the bank tightens, short yields rise faster than long ones and the curve flattens, often inverting before a downturn. A common guide to policy is the Taylor rule, which sets the policy rate at i = neutral real rate + current inflation + 0.5 × (inflation − target) + 0.5 × output gap. Long-maturity government bonds, with their longer duration, tend to do best when rates fall into a downturn and worst during tightening. The trap is forgetting the current inflation term in the Taylor rule, which confuses the nominal rate with the real rate.