According to the expectations theory, when the yield curve is falling, market participants expect
A)future long-term interest rates to rise above current short-term rates.
B)future long-term interest rates to fall below current long-term rates.
C)future short-term interest rates to rise above current short-term rates.
D)future short-term interest rates to fall below current short-term rates.

Question

Quizplus · Accepted Answer

The expectations theory suggests that the shape of the yield curve reflects market expectations of future interest rates. A falling yield curve indicates that market participants expect long-term interest rates to decrease in the future. Therefore, future long-term interest rates are expected to fall below current long-term rates. Choice B is the correct answer.

According to the Expectations Theory, When the Yield Curve Is