The outlook for future inﬂation inﬂuences the shape of the term structure of interest rates.

Question

Quizplus · Accepted Answer

The expectations of future inflation play a significant role in shaping the term structure of interest rates. If investors anticipate higher inflation in the future, they demand higher interest rates to compensate for the loss of purchasing power of their investment. This leads to a steeper yield curve, where long-term rates are higher than short-term rates. Conversely, if inflation is expected to be low or declining, the yield curve may flatten, with short and long-term rates converging.

The Outlook for Future Inﬂation Inﬂuences the Shape of the Term