According to pure expectations theory, if interest rates are expected to decrease, there will be ____ pressure on the demand for short-term funds by borrowers and ____ pressure on the demand for long-term funds issued by borrowers.
A)upward; upward
B)downward; downward
C)upward; downward
D)downward; upward

Question

Quizplus · Accepted Answer

According to pure expectations theory, if interest rates are expected to decrease, borrowers will expect to be able to borrow at lower rates in the future, so there will be upward pressure on the demand for short-term funds by borrowers. Lenders will also expect to be able to lend at lower rates in the future, so there will be downward pressure on the demand for long-term funds issued by borrowers.

According to Pure Expectations Theory, If Interest Rates Are Expected