According to the expectations theory, if next year's expected short-term rate is below the current short-term rate, the yield curve will be
A)horizontal.
B)vertical.
C)upward sloping.
D)downward sloping.

Question

Quizplus · Accepted Answer

According to the expectations theory, if next year's expected short-term rate is below the current short-term rate, it implies that interest rates are expected to decline in the future. This expectation will lead to a higher demand for long-term bonds, driving their prices up and their yields down. As a result, the yield curve will become downward sloping, indicating that investors expect lower rates in the future.

According to the Expectations Theory, If Next Year's Expected Short-Term