One of the following statements is not a conclusion or assumption of the expectations hypothesis. Which one?
A) All maturities of securities are perfect substitutes in the minds of investors
B) In equilibrium the investor should earn the same yield from buying a long-term security as from purchasing a series of short-term securities whose combined maturity equals that of the long-term security
C) Changes in the relative amounts in the marketplace of long-term versus short-term securities will influence the shape of the yield curve
D) The long-term interest rate is the geometric average of a series of interest rates on short-term loans whose combined maturities equal that of the long-term loan
E) All of the above are assumptions or conclusions of the expectations hypothesis

Question

Quizplus · Accepted Answer

The expectations hypothesis primarily focuses on how future interest rates are reflected in the yield curve and assumes that the future short-term rates determine the long-term rates. It does not account for changes in the supply and demand for different maturities of securities affecting the yield curve, which is what option C suggests.

One of the Following Statements Is Not a Conclusion or Assumption