According to the expectations theory of term structure,if next year's short-term interest rate is expected to be higher than the current short-term rate,the:
A) current short-term rate will be equal to the current long-term rate.
B) current short-term rate will be higher than the current long-term rate.
C) current short-term rate will be lower than the current long-term rate.
D) yield curve will be downward-sloping.

Question

Quizplus · Accepted Answer

According to the expectations theory of term structure, if next year's short-term interest rate is expected to be higher than the current short-term rate, the current short-term rate will be lower than the current long-term rate. This is because investors will demand a higher yield on long-term bonds to compensate for the expected rise in short-term rates. Therefore, the yield curve will be upward-sloping.

According to the Expectations Theory of Term Structure,if Next Year's