Assume the yield curve is flat. If investors flood the short-term market and avoid the long-term market, they may cause the yield curve to
A)remain flat.
B)become upward sloping.
C)become downward sloping.
D)None of these are correct.

Question

Quizplus · Accepted Answer

When investors flood the short-term market, they drive down short-term interest rates due to increased demand for short-term securities. Conversely, avoiding the long-term market reduces demand for long-term securities, potentially leading to higher long-term interest rates. This divergence in interest rates can cause the yield curve to become upward sloping, as long-term rates become higher relative to short-term rates.

Assume the Yield Curve Is Flat