According to the expectations hypothesis:
A) when short-term interest rates are expected to rise in the future, the long-term interest rates are equal to current short-term interest rates.
B) when short-term rates are expected to remain constant in the future, the long-term interest rates are higher than current short-term interest rates.
C) short-term bonds are perfect substitutes for long-term bonds.
D) expectations of future short-term rates equal estimates of current short-term rates.

Question

Quizplus · Accepted Answer

The expectations hypothesis suggests that long-term interest rates are determined by current and expected future short-term interest rates, implying that short-term and long-term bonds are perfect substitutes.

According to the Expectations Hypothesis