Economists forecast the following inflation rates for the next four years: Under these conditions the ____ theory says the yield curve should slope ____ to the right.

Question

Economists forecast the following inflation rates for the next four years:  Under these conditions the ____ theory says the yield curve should slope ____ to the right.

Quizplus · Accepted Answer

The expectations theory predicts that long-term interest rates will be equal to the expected average of short-term interest rates over the same period. If economists forecast high inflation rates in the future, the expectations theory would indicate that short-term interest rates would increase to combat inflation. This, in turn, would lead to a rise in long-term interest rates, causing the yield curve to slope upward to the right.

Economists Forecast the Following Inflation Rates for the Next Four