If short-term and long-term interest rates are currently equal and the Fed contracts the money supply, the yield curve would be expected to:
A)become downward sloping.
B)become upward sloping.
C)become vertical.
D)be unaffected.

Question

Quizplus · Accepted Answer

When the Fed contracts the money supply, short-term interest rates typically rise more quickly than long-term rates, leading to a downward sloping yield curve. This reflects higher short-term borrowing costs relative to long-term costs.

If Short-Term and Long-Term Interest Rates Are Currently Equal and the Fed