If we hold risk and liquidity fixed, then at the long-term interest rate appears to be largely composed of a weighted average of current and future expected to short-term interest rates.

Question

Quizplus · Accepted Answer

This statement aligns with the expectations hypothesis, which suggests that the long-term interest rate is indeed determined by the market's expectations of future short-term rates, adjusted for risk and liquidity preferences. Holding risk and liquidity constant, the long-term rate reflects an average of current and anticipated short-term rates.

If We Hold Risk and Liquidity Fixed, Then at the Long-Term