Which of the following combinations will result in a sharply-increasing yield curve?
A) Increasing future expected short rates and increasing liquidity premiums
B) Decreasing future expected short rates and increasing liquidity premiums
C) Increasing future expected short rates and decreasing liquidity premiums
D) Increasing future expected short rates and constant liquidity premiums
E) Constant future expected short rates and increasing liquidity premiums

Question

Quizplus · Accepted Answer

A sharply-increasing yield curve is typically caused by increasing future expected short rates combined with increasing liquidity premiums, as both factors contribute to higher long-term yields relative to short-term yields.

Which of the Following Combinations Will Result in a Sharply-Increasing