An inverted yield curve is a valuable forecasting tool because:
A) the yield curve usually is inverted so it reflects a growing economy.
B) the yield curve seldom is inverted and can signal an economic slowdown.
C) investors are expecting higher short-term rates in the future, and this usually signals an economic slowdown.
D) inverted yield curves signal better economic times are expected.

Question

Quizplus · Accepted Answer

An inverted yield curve is when short-term interest rates are higher than long-term interest rates. This is a rare occurrence but is a valuable forecasting tool because it has historically preceded economic slowdowns and even recessions. Therefore, option B is correct because an inverted yield curve can signal an economic slowdown. Option C is partially correct because investors expecting higher short-term rates in the future can lead to an inverted yield curve, but this is not the main reason why an inverted yield curve is a valuable forecasting tool. Options A and D are both incorrect because an inverted yield curve does not signal better economic times are expected, and the yield curve is not usually inverted when the economy is growing.

An Inverted Yield Curve Is a Valuable Forecasting Tool Because