Under the expectations hypothesis, if expectations are for lower inflation in the future than what it currently is, the yield curve's slope will:
A) become more upward sloping.
B) become flat.
C) be negative.
D) be vertical.

Question

Quizplus · Accepted Answer

If expectations are for lower inflation in the future, interest rates are expected to decrease, leading to a downward sloping or negative yield curve as long-term rates fall below short-term rates.

Under the Expectations Hypothesis, If Expectations Are for Lower Inflation