Given r₁ = .050 and r₂ = .054, what can you deduce about investor's expectations of future short-term interest rates if the expectations hypothesis is correct? A) Investors expect future short-term rates to be greater than current short-term rates. B) Investors expect future short-term rates to be less than current short-term rates. C) Investors expect future short-term rates to be equal to current short-term rates. D) Investors expect future short-term rates to be higher than current forward rates.

Question

Quizplus · Accepted Answer

The expectations hypothesis suggests that long-term interest rates are an average of current and expected future short-term interest rates. Given that the 2-year rate (.054) is higher than the 1-year rate (.050), it implies that investors expect future short-term rates to be higher than the current short-term rates.

Given R1 =

Given R₁ =