According to the expectations theory, if the market believes that interest rates are likely to decrease in the near future,
A) borrowers would immediately increase their supply of short-term securities.
B) investors would immediately increase their demand for long-term securities.
C) borrowers would immediately increase their supply of long-term securities.
D) neither borrowers nor investors would do anything until the interest rates actually increase.
E) both a and b

Question

Quizplus · Accepted Answer

According to the expectations theory, if the market believes that interest rates are likely to decrease in the near future, investors would immediately increase their demand for long-term securities because they can lock in higher interest rates for a longer period of time. Borrowers would also immediately increase their supply of long-term securities because they can issue debt at lower interest rates.

According to the Expectations Theory, If the Market Believes That