Yield curve studies of the yield spread between long-term and short-term government securities are being used to predict:
A) The probability of a recession
B) The near-term growth in Gross Domestic Product (GDP)
C) The size of government budget deficits
D) Choices A and C only
E) Choices A and B only

Question

Quizplus · Accepted Answer

Yield curve studies, particularly the spread between long-term and short-term government securities, are a tool used by economists and investors to predict economic conditions. A normal yield curve (where long-term rates are higher than short-term rates) suggests economic expansion, while an inverted yield curve (where short-term rates are higher than long-term rates) is often seen as a predictor of economic recession. Therefore, these studies can help predict the probability of a recession (A) and near-term GDP growth (B). They are not directly used to predict the size of government budget deficits (C).

Yield Curve Studies of the Yield Spread Between Long-Term and Short-Term