According to expectations theory, the sudden expectation of lower interest rates in the future will cause a ____ supply of short-term funds provided by investors, and a ____ supply of long-term funds.
A)large; large
B)large; small
C)small; small
D)small; large

Question

Quizplus · Accepted Answer

According to the expectations theory, if investors expect lower interest rates in the future, they will demand fewer long-term bonds in the present, leading to a decrease in supply. On the other hand, the demand for short-term funds may increase as investors may prefer to hold short-term bonds until the interest rates fall further. This would lead to a decrease in the supply of short-term funds as investors are holding onto their investments for a shorter duration. Therefore, the sudden expectation of lower interest rates will cause a small supply of short-term funds provided by investors, and a large supply of long-term funds.

According to Expectations Theory, the Sudden Expectation of Lower Interest