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

The Expectations Hypothesis states that long-term interest rates are equal to the expected average of short-term interest rates over the same time period. When the yield curve is downward-sloping, it suggests that investors expect future short-term interest rates to fall, leading to lower long-term rates.

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