When yield curves are steeply upward-sloping,
A) long-term interest rates are above short-term interest rates.
B) short-term interest rates are above long-term interest rates.
C) short-term interest rates are about the same as long-term interest rates.
D) medium-term interest rates are above both short-term and long-term interest rates.
E) medium-term interest rates are below both short-term and long-term interest rates.

Question

Quizplus · Accepted Answer

When yield curves are steeply upward-sloping, it means that long-term interest rates are higher than short-term interest rates. This is known as a normal yield curve or a positive yield curve. It is a sign of expansion in the economy and investors expect higher inflation in the future. Therefore, they demand a higher yield on long-term bonds to compensate for the inflation risk.

When Yield Curves Are Steeply Upward-Sloping