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

According to the Expectations Hypothesis, long-term interest rates are a function of current and future expected short-term interest rates. When the yield curve is downward-sloping, it indicates that investors expect short-term interest rates to fall in the future. This is because investors are willing to lock in lower long-term interest rates now, anticipating that short-term rates will be lower in the future, thus causing the yield curve to slope downward.

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