According to the expectations theory of term structure,if next year's short-term interest rate is expected to be lower 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 upward-sloping.

Question

Quizplus · Accepted Answer

The expectations theory of term structure suggests that if next year's short-term interest rates are expected to be lower than the current short-term rates, the current short-term rate will be higher than the current long-term rate. This is because the long-term rate reflects the average of current and expected future short-term rates. If future rates are expected to decrease, it implies that the current short-term rate is higher to balance the average.

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