Under the expectations hypothesis, a downward-sloping yield curve suggests:
A) investors expect future short-term interest rates to fall.
B) investors expect future short-term interest rates to rise.
C) this is a trick question, the yield curve always slopes upward.
D) investors expect future short-term interest rates to remain constant.

Question

Quizplus · Accepted Answer

The expectations hypothesis states that long-term interest rates reflect investors' expectations about future short-term interest rates. Therefore, a downward sloping yield curve suggests that investors expect future short-term interest rates to fall.

Under the Expectations Hypothesis, a Downward-Sloping Yield Curve Suggests