Given r₁= .050 and r₂= .054, what can you deduce about investor's expectations of future short-term interest rates if the expectations hypothesis is correct? A) Investors expect future short-term rates to be greater than current short-term rates. B) Investors expect future short-term rates to be less than current short-term rates. C) Investors expect future short-term rates to be equal to current short-term rates.

Question

Quizplus · Accepted Answer

The expectations hypothesis states that long-term interest rates are determined by the market's expectations of future short-term interest rates. If the yield curve is upward-sloping (as it is in this case), it implies that investors expect future short-term rates to be higher than current short-term rates. Therefore, the correct choice is A.

Given R1=

Given R₁=