Assume that the one-year interest rate is on the vertical axis of the IS-LM model and that the yield curve is initially upward sloping.Suppose that financial market participants expect that the central bank will pursue a monetary contraction in the future.Given this information,we would expect which of the following to occur?

Question

Quizplus · Accepted Answer

When financial market participants expect a future monetary contraction, they expect short-term interest rates to increase more than long-term interest rates. This leads to an increase in the slope of the yield curve, making it steeper.

Assume That the One-Year Interest Rate Is on the Vertical