Suppose that financial market participants now expect a future tax cut and that the yield curve is initially upward sloping.Given this information,we would expect which of the following to occur?

Question

Quizplus · Accepted Answer

If financial market participants expect a future tax cut, they may increase their expectations of future economic growth, which would lead to an increase in bond yields on longer-term maturities. This would cause the yield curve to become even steeper. Therefore, the correct choice is A.

Suppose That Financial Market Participants Now Expect a Future Tax