When long-term interest rates are higher than short-term rates, as they were in 2010, it:
A) implies that short-term interest rates are expected to fall.
B) has no implication for short-term interest rates.
C) implies that inflation will fall.
D) implies that short-term interest rates are expected to rise.

Question

Quizplus · Accepted Answer

When long-term interest rates are higher than short-term rates, it implies that the market expects short-term interest rates to rise in the future. This is because investors demand a higher return for holding long-term bonds, which are more sensitive to changes in interest rates, than they do for holding short-term bonds. Therefore, they would only be willing to hold long-term bonds if they expect that short-term interest rates will rise in the future.

When Long-Term Interest Rates Are Higher Than Short-Term Rates, as They