Assuming that the expectations theory is true, a normal yield curve implies that interest rates will:
A) be lower in the future.
B) be the same in the future.
C) increase in the short-term, and then decrease.
D) be higher in the future.
E) decrease in the short-term, and then increase.

Question

Quizplus · Accepted Answer

The expectations theory suggests that if the yield curve is normal (upward sloping), it implies that investors expect future short-term interest rates to be higher. This is because they demand higher yields for longer maturities to compensate for the anticipated rise in rates.

Assuming That the Expectations Theory Is True, a Normal Yield