An upward-sloping yield curve can best be explained by:
A)the relationship between nominal interest rates and expected inflation rates.
B)the expectation that short-term interest rates will decrease in the future.
C)the fact that short-term interest rates are more inflation-sensitive than long-term rates.
D)the expectation that inflation will increase in the future.

Question

Quizplus · Accepted Answer

An upward-sloping yield curve indicates that long-term interest rates are higher than short-term rates. This can be explained by the expectation that inflation will increase in the future. As investors expect inflation to rise, they demand a higher return on long-term investments to compensate for the expected loss of purchasing power.

An Upward-Sloping Yield Curve Can Best Be Explained By