If long-term interest rates are 8% and short-term rates are 3%, the market expects:
A) short-term rates to fall.
B) short-term rates to rise.
C) short-term rates to remain the same.
D) there is no relationship between long-term and short-term rates.

Question

Quizplus · Accepted Answer

The market expects short-term rates to rise to eventually meet the 8% long-term rate. The difference between the two rates is also known as the yield curve, and when it is upward sloping (as is the case in this scenario), it typically signals expected economic growth and inflation.

If Long-Term Interest Rates Are 8% and Short-Term Rates Are