According to expectations theory, the sudden expectation of lower interest rates in the future will cause investors to provide a ____ supply of short-term funds and a ____ supply of long-term funds.
A)large; large
B)large; small
C)small; small
D)small; large

Question

Quizplus · Accepted Answer

Expectations theory suggests that if investors expect lower interest rates in the future, they would prefer to lend short-term (to take advantage of higher rates now) and be less willing to lock in long-term funds at current rates, anticipating lower returns. This leads to a smaller supply of short-term funds and a larger supply of long-term funds.

According to Expectations Theory, the Sudden Expectation of Lower Interest