-Refer to Figures A, B, and C. According to expectations theory, which of the figures best reflects a situation where i?i???
A) Figure A
B) Figure B
C) Figure C
D) None of the above

Question

-Refer to Figures A, B, and C. According to expectations theory, which of the figures best reflects a situation where i?>i???
A) Figure A 
B) Figure B 
C) Figure C 
D) None of the above

Quizplus · Accepted Answer

Expectations theory states that the yield curve reflects the market's expectations of future short-term interest rates. In Figure C, the yield curve is upward sloping, which means that the market expects short-term interest rates to increase in the future. This is consistent with the situation where i?>i???, as an upward sloping yield curve indicates that investors expect higher future interest rates.