The expectations hypothesis assumes each of the following, except:
A) long-term bond rates are equal to the average of current and expected future short-term interest rates.
B) bonds of different maturities are not perfect substitutes.
C) bonds of different maturities have the same risk characteristics.
D) bonds of different maturities are perfect substitutes.

Question

Quizplus · Accepted Answer

The expectations hypothesis assumes that bonds of different maturities are perfect substitutes (D) and have the same risk characteristics (C), and that long-term rates are averages of current and expected future short-term rates (A). It does not assume that bonds of different maturities are not perfect substitutes (B).

The Expectations Hypothesis Assumes Each of the Following, Except