According to the expectations theory of term structure, if next year's short-term interest rate is expected to be above the current short-term rate, the
A) current long-term rate will be equal to the current short-term rate.
B) current long-term rate will be below the current short-term rate.
C) current long-term rate will be above the current short-term rate.
D) yield curve will have a negative slope.

Question

Quizplus · Accepted Answer

The expectations theory of term structure maintains that long-term interest rates are essentially the average of expected future short-term interest rates. If next year's short-term interest rate is expected to be above the current short-term rate, this implies that interest rates are anticipated to rise in the future. As a result, the long-term rate would have to be higher than the current short-term rate to reflect this expectation of higher rates in the future. Thus, choice C is the best answer.

According to the Expectations Theory of Term Structure, If Next