Use the following figure to answer the question :

-The U-shaped yield curve in the figure above indicates that the inflation rate is expected to
A)remain constant in the near-term and fall later on.
B)fall sharply in the near-term and rise later on.
C)rise moderately in the near-term and fall later on.
D)remain constant in the near-term and rise later on.

Question

Use the following figure to answer the question :

-The U-shaped yield curve in the figure above indicates that the inflation rate is expected to
A)remain constant in the near-term and fall later on. 
B)fall sharply in the near-term and rise later on. 
C)rise moderately in the near-term and fall later on. 
D)remain constant in the near-term and rise later on.

Quizplus · Accepted Answer

A U-shaped yield curve typically indicates that interest rates (and by extension, inflation expectations if we're interpreting the yield curve as reflecting those) are expected to fall in the near term but then rise later on. This is because the initial downward slope suggests lower yields on short-term bonds (implying lower interest rates in the near term), and the upward slope for longer-term bonds suggests higher yields (implying expectations of higher interest rates or inflation in the future).

Use the Following Figure to Answer the Question