If all future expected short-term interest rates are equal to the current short-term interest rate, the expectations theory predicts that the yield curve would be
A) horizontal.
B) upward sloping.
C) downward sloping.
D) vertical.

Question

Quizplus · Accepted Answer

The expectation theory states that the shape of the yield curve depends on investors' expectations of future interest rates. If all future expected short-term interest rates are equal to the current short-term interest rate, then there would be no expectation of changes in interest rates, leading to a flat or horizontal yield curve.

If All Future Expected Short-Term Interest Rates Are Equal to the Current